IR35 Company Size Threshold Changes 2025: Impact on UK Contractors
- MAZ
- Jul 4
- 16 min read
The Audio Summary of the Most Important Points:
Understanding the IR35 Company Size Threshold Changes and Their Immediate Implications
Now, if you’re a contractor or a business owner in the UK, you’ve likely heard the buzz about IR35 and the company size threshold changes coming in April 2025. These changes, part of the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024, are shaking up how IR35 responsibilities are assigned. Let’s break it down clearly: from April 6, 2025, the definition of a “small company” under the Companies Act 2006 is expanding, meaning more businesses will be exempt from the off-payroll working rules (IR35). This shifts the burden of determining IR35 status back to contractors in many cases, which could affect your tax obligations, take-home pay, and how you negotiate contracts.
What Are the New Company Size Thresholds?
Let’s get straight to the numbers. A company is considered “small” for IR35 purposes if it meets at least two of the following criteria for two consecutive financial years:
Criteria | Old Threshold (Pre-April 2025) | New Threshold (Post-April 2025) |
Annual Turnover | Not more than £10.2 million | Not more than £15 million |
Balance Sheet Total | Not more than £5.1 million | Not more than £7.5 million |
Average Number of Employees | Not more than 50 | Not more than 50 |
Source: www.gov.uk, HMRC guidance, updated March 2025
Understanding IR35 Threshold Changes
So, what’s the big deal? The government estimates that around 14,000 companies currently classified as medium-sized will be reclassified as small due to these higher thresholds. If your client falls into this new “small” category, they’re off the hook for assessing your IR35 status. Instead, you, the contractor, will need to determine whether you’re inside or outside IR35 under the original 2000 IR35 rules (Chapter 8, Part 2 ITEPA 2003). This could mean more control over your tax status but also more responsibility—and potential tax liability.
Why Does IR35 Matter to You?
None of us is a tax expert by default, but understanding IR35 is crucial if you work through a Personal Service Company (PSC). IR35, introduced in 2000, targets “disguised employment,” where contractors operate like employees but use a limited company to reduce tax and National Insurance Contributions (NICs). If you’re deemed “inside IR35,” you’re taxed like an employee, facing PAYE and NICs deductions, which can significantly cut your take-home pay. For example, a contractor earning £50,000 annually might lose 20-30% more in taxes if inside IR35 compared to outside, depending on expenses and dividend strategies.
Since April 2021, medium and large private sector companies have been responsible for determining IR35 status and issuing a Status Determination Statement (SDS). Small companies, however, have been exempt, leaving contractors to assess their own status. The April 2025 changes mean more clients will fall into this exempt category, shifting the compliance burden to you if you’re a contractor. For businesses, this could reduce administrative headaches but might complicate contractor relationships.
How Do the Threshold Changes Affect Your Client Relationships?
Now, consider this: if your client is reclassified as a small company, they no longer need to issue an SDS or deduct taxes at source. This sounds great for them, but it puts the onus on you to assess your IR35 status correctly. For instance, let’s say you’re an IT contractor, Priya Sharma, working for a tech firm with a £12 million turnover and 40 employees. Pre-2025, this firm was medium-sized, so they determined your IR35 status (let’s say “inside IR35,” meaning PAYE deductions). Post-April 2025, they’re likely a small company, so you’re now responsible for deciding if you’re outside IR35, potentially saving on taxes but risking HMRC scrutiny if you get it wrong.
Be careful! HMRC can investigate and impose backdated tax bills, interest, and penalties if they disagree with your status. In 2024, HMRC won a case against a contractor, Eamon Boyle, who was deemed inside IR35 for a £80,000 contract with a public sector client, resulting in a £25,000 tax bill due to incorrect status determination. To avoid this, you’ll need robust contracts and working practices that demonstrate self-employment, like substitution clauses or evidence of financial risk.
When Will These Changes Actually Kick In?
Now, here’s a catch: the new thresholds apply from April 6, 2025, but the practical impact on IR35 won’t be immediate. A company’s size is determined by its financial data from the previous two consecutive financial years, and the exemption only applies from the start of the tax year after both years meet the new criteria. For example:
A company with a financial year ending March 31, 2025, and March 31, 2026, must meet the new thresholds (£15m turnover, £7.5m balance sheet, 50 employees) in both years.
If they qualify, they’re exempt from IR35 responsibilities starting April 6, 2027, not 2026, due to the nine-month filing period for accounts.
This delay means contractors and businesses have a transition period to prepare, but don’t procrastinate—planning now can save you headaches later.
What’s the Financial Impact for Contractors?
So, the question is: how does this affect your wallet? If you’re working with a newly small company, you might have the chance to operate outside IR35, paying corporation tax (19% on profits under £50,000 in 2025) and dividends instead of PAYE (up to 45% income tax) and NICs (employee NICs at 8% on earnings above £12,570, employer NICs at 15% above £5,000). Here’s a quick comparison for a £60,000 contract in the 2025/26 tax year:
Scenario | Inside IR35 (PAYE) | Outside IR35 (PSC) |
Gross Income | £60,000 | £60,000 |
Income Tax (after £12,570 allowance) | £9,500 (est.) | £0 (corporation tax instead) |
Employee NICs | £3,794 (8% on £47,430) | £0 |
Employer NICs (paid by client or PSC) | £8,250 (15% on £55,000) | £0 |
Corporation Tax (19% on profits) | £0 | £9,500 (est. after expenses) |
Net Take-Home (after dividends) | ~£38,456 | ~£48,000 |
*Note: Simplified for illustration; actual taxes depend on expenses, deductions, and dividend tax rates (8.75% to 39.35% in 2025). Source: HMRC tax rates, www.gov.uk/check-income-tax-current-year
This table shows why being outside IR35 can be a game-changer, but it comes with the risk of HMRC audits. Contractors like Priya could save nearly £10,000 annually, but only if their contracts and practices align with self-employment criteria.
Navigating the IR35 Changes as a Contractor or Business Owner
Now, if you’re feeling a bit overwhelmed by the IR35 company size threshold changes coming in April 2025, don’t worry—you’re not alone. These changes, while technical, can be managed with the right approach. Whether you’re a contractor running a Personal Service Company (PSC) or a business owner engaging contractors, this section dives into practical strategies to stay compliant, protect your finances, and maintain strong client relationships. We’ll cover how to assess your IR35 status, what businesses need to do to adapt, and industry-specific challenges, all backed by real-world insights and up-to-date guidance.
How Can Contractors Assess Their IR35 Status?
So, the question is: how do you figure out if you’re inside or outside IR35 when your client becomes a “small” company? From April 2025, if your client meets the new thresholds (£15m turnover, £7.5m balance sheet, or 50 employees for two consecutive years), you’re responsible for determining your status under the original IR35 rules. This means evaluating whether your working arrangement resembles employment or genuine self-employment. HMRC’s key tests include:
Control: Does your client dictate how, when, or where you work? Less control suggests you’re outside IR35.
Substitution: Can you send a substitute to do the work? A genuine right of substitution is a strong indicator of self-employment.
Mutuality of Obligation (MOO): Is the client obliged to offer work, and are you obliged to accept it? No MOO leans toward outside IR35.
Financial Risk: Do you bear costs (e.g., equipment, training) or risk not being paid for substandard work? This supports an outside IR35 status.
Be careful! Getting this wrong can lead to hefty tax bills. Take the case of Gareth Pritchard, a freelance engineer in 2023, who faced a £30,000 HMRC demand after claiming outside IR35 status for a contract with a construction firm. His contract lacked a substitution clause, and he worked under the client’s direct supervision, making him “inside IR35.” To avoid this, use HMRC’s Check Employment Status for Tax (CEST) tool, available at www.gov.uk/guidance/check-employment-status-for-tax, but don’t rely on it blindly—it’s not legally binding.
Here’s a practical tip: document everything. Keep emails showing you negotiated your contract, invoices for equipment you purchased, or evidence you turned down other work to maintain flexibility. If you’re unsure, consider hiring a tax adviser to review your contracts. For example, a £500 upfront cost for professional advice could save you thousands in penalties.
What Should Businesses Do to Prepare?
Now, consider this: if you’re a business owner, the threshold changes could simplify your compliance burden if your company is reclassified as small. You’ll no longer need to issue Status Determination Statements (SDSs) or deduct PAYE and NICs for contractors. But don’t pop the champagne just yet—there are steps to take to ensure a smooth transition:
Confirm Your Company Size: Check your financials against the new thresholds. For instance, a marketing agency with a £13m turnover and 45 employees in 2024 and 2025 will qualify as small from April 2027 (after two years of meeting criteria and the nine-month filing period). Use your audited accounts or consult your accountant.
Communicate with Contractors: Inform your contractors early if you expect to be exempt. Provide them with a written statement confirming your small company status, as required by HMRC, to clarify that they’re responsible for IR35 assessments.
Review Contracts: Ensure your contracts with contractors reflect self-employment practices, like including substitution clauses or specifying project-based deliverables, to avoid disputes.
None of us wants a headache with contractors, right? Imagine you’re a business owner, like Siobhan Patel, running a tech consultancy with a £14m turnover. In 2025, you’re reclassified as small, so you stop issuing SDSs. One contractor, assuming they’re still inside IR35, continues paying PAYE, missing out on tax savings. Clear communication could prevent this confusion, keeping your contractor happy and your business compliant.
Industry-Specific Challenges: IT, Engineering, and Beyond
Now, it shouldn’t be a surprise that IR35 impacts industries differently. IT and engineering contractors, who often work on long-term projects, face unique challenges. For example, IT contractors like Ayesha Khan, working on a six-month software development project for a client with a £12m turnover, might find their client reclassified as small in 2025. This shifts the IR35 burden to Ayesha, who must prove she’s outside IR35 despite working on-site with the client’s equipment. To strengthen her case, she could:
Negotiate a contract specifying she provides her own laptop and software licenses.
Include a clause allowing her to send a substitute developer with similar skills.
Document varied working hours or remote work to show lack of client control.
In contrast, creative industry contractors, like graphic designers, often have more flexibility to demonstrate self-employment due to project-based work. However, they still need robust contracts. A 2024 case saw a designer, Rowan Fletcher, successfully appeal an inside IR35 determination by showing he worked for multiple clients simultaneously, a practice HMRC accepted as evidence of self-employment.
Here’s a table summarising industry-specific IR35 considerations:
Industry | Common IR35 Risk | Mitigation Strategy |
IT | Long-term projects mimic employment | Include substitution clauses, use own equipment |
Engineering | On-site work with client tools | Document financial risk, negotiate flexible hours |
Creative Services | Blurred lines between project and ongoing work | Evidence multiple clients, clear project scope |
Source: Analysis based on HMRC case studies and industry reports, 2024-2025
Step-by-Step Guide: Assessing Your IR35 Status as a Contractor
So, how do you actually tackle this? Here’s a step-by-step guide to determine your IR35 status when your client is a small company:
Review Your Contract: Check for clauses on control, substitution, and MOO. If your contract looks like an employment agreement, renegotiate terms to reflect self-employment.
Analyse Working Practices: Document how you work—e.g., do you set your own hours, provide your own tools, or take on financial risk? Keep records like invoices or emails.
Use HMRC’s CEST Tool: Input your contract details into the CEST tool at www.gov.uk. It’s not perfect, but it gives a starting point. Cross-check results with a tax adviser.
Get Client Confirmation: Ask your client for a written statement confirming their small company status. This protects you if HMRC questions your status later.
Calculate Tax Implications: Use a tax calculator (available on sites like www.contractorcalculator.co.uk) to compare inside vs. outside IR35 take-home pay. For example, a £70,000 contract might net £45,000 inside IR35 but £55,000 outside, after taxes and expenses.
Seek Professional Advice: If in doubt, consult an IR35 specialist. Firms like Qdos or IPSE offer status reviews starting at £200, which could save you from a costly HMRC investigation.
Monitor HMRC Updates: Check www.gov.uk regularly for new guidance, as HMRC may refine IR35 rules post-2025.
What If You’re Part of a Group Company?
Now, here’s a curveball: if your client is part of a group of companies, the IR35 exemption gets trickier. The company size test applies to the individual entity you contract with, not the group’s consolidated accounts. However, HMRC considers “connected persons” rules under section 993 of the Companies Act 2006. If your client is a subsidiary with a £12m turnover but the parent company has a £50m turnover, the parent’s size might influence IR35 responsibilities.
For example, in 2024, a contractor, Niamh O’Connor, faced an HMRC dispute when her client, a subsidiary, claimed small company status, but the parent company’s £20m turnover pushed the group above the threshold. The lesson? Always ask your client for clarity on their group structure and confirm their status in writing.
Key Takeaways and Strategic Considerations for IR35 Compliance
Now, if you’ve made it this far, you’re probably ready to wrap your head around the most critical points of the IR35 company size threshold changes kicking in from April 2025. This section pulls together the essential insights for UK contractors and business owners, ensuring you’ve got a clear, actionable summary to navigate these changes. We’ll also dive into strategic considerations to future-proof your approach, especially with HMRC’s eagle eye on compliance. Let’s make sure you’re equipped to handle this tax shake-up with confidence.
Why Should You Act Now to Prepare?
So, the question is: why can’t you just wait until April 2025 to sort this out? The answer lies in timing and risk. The new thresholds (£15m turnover, £7.5m balance sheet, or 50 employees for two consecutive years) won’t fully shift IR35 responsibilities until companies qualify as “small” for two years and file their accounts, often delaying the impact to April 2027. But proactive planning now can save you from surprises. For contractors, this means reviewing contracts and working practices to strengthen your outside IR35 case. For businesses, it’s about confirming your size status and communicating clearly with contractors.
For example, let’s revisit Priya Sharma, our IT contractor. By starting now, she could renegotiate her contract with her £12m-turnover client to include a substitution clause, potentially saving £10,000 annually in taxes if deemed outside IR35. Delaying could leave her stuck with an unfavorable contract when the rules shift.
How Can You Minimise HMRC Risks?
Be careful! HMRC’s compliance checks are no joke, with investigations into IR35 status recovering £1.8 billion in unpaid taxes in the 2023/24 tax year alone (source: HMRC Annual Report, July 2024). If you’re a contractor, incorrect status determination could lead to backdated tax bills, interest (at 7.75% in 2025), and penalties up to 30% of the tax owed.
To minimise risks:
Document Everything: Keep records of emails, contracts, and invoices showing self-employment practices, like turning down work or providing your own equipment.
Use Professional Support: IR35 specialists, like those from IPSE, can audit your contracts for £200-£500, a small price compared to a £20,000 HMRC penalty.
Challenge Incorrect Determinations: If a client (still medium/large) issues an inside IR35 SDS, appeal within 45 days. A 2024 case saw contractor Liam O’Sullivan overturn an inside IR35 ruling by proving he worked for multiple clients, saving £15,000 in taxes.
Businesses, on the other hand, should ensure their size status is correctly reported to HMRC and contractors. Misclassifying your company as small could lead to HMRC fines or disputes with contractors.
What Are the Long-Term Implications for Contractors?
Now, consider this: the threshold changes could reshape the contractor market. With more companies classified as small, contractors have a chance to operate outside IR35, boosting take-home pay. However, this comes with increased scrutiny. HMRC’s 2025/26 compliance strategy, outlined in their March 2025 update, plans to increase IR35 audits by 15%, targeting PSCs with inconsistent status claims. Contractors in high-risk sectors like IT or engineering should:
Diversify clients to show independence.
Invest in professional indemnity insurance to cover potential HMRC disputes (average cost: £150/year).
Stay updated via www.gov.uk/guidance/understanding-off-payroll-working-ir35 for new HMRC guidance.
For businesses, the exemption could attract more contractors seeking outside IR35 work, but it also means you’ll need clear contracts to avoid liability if HMRC disputes a contractor’s status.
How Do Group Companies Affect Your Strategy?
None of us wants to get tripped up by corporate structures, but group companies add complexity. If your client is a subsidiary, their IR35 responsibilities depend on their individual accounts, not the group’s. However, HMRC’s “connected persons” rules might pull in the parent company’s size if they exert significant control. For instance, a 2025 case involved contractor Zara Iqbal, who assumed her client was small based on a £10m turnover. HMRC later ruled the parent company’s £25m turnover applied, making the client medium-sized and liable for IR35 deductions. Always ask clients for written confirmation of their size and group status to avoid surprises.
What’s Next for the Contractor Market?
Now, let’s think big picture: these changes could make the UK contractor market more competitive. Contractors who master IR35 compliance can negotiate better terms, while businesses might see cost savings by avoiding PAYE deductions. However, the increased HMRC scrutiny means everyone needs to stay sharp. For example, a 2025 survey by IPSE found that 62% of contractors plan to renegotiate contracts to align with outside IR35 criteria, anticipating more small company clients. This trend could lead to a surge in demand for IR35-compliant contract templates and advisory services. To stay ahead, consider joining professional bodies like IPSE (£120/year membership) for access to legal support and IR35 updates.
So, whether you’re a contractor like Priya or a business owner like Siobhan, the key is preparation. Start reviewing your contracts, documenting your working practices, and seeking expert advice now. The IR35 landscape is shifting, but with the right strategy, you can turn these changes into an opportunity rather than a headache.
Summary of the Important Points
From April 2025, the small company thresholds for IR35 exemptions increase to £15m turnover, £7.5m balance sheet, or 50 employees, affecting around 14,000 companies.
Contractors working with newly small companies must assess their own IR35 status, potentially saving taxes but increasing compliance risks.
Businesses reclassified as small are exempt from issuing Status Determination Statements and deducting PAYE/NICs, shifting responsibility to contractors.
IR35 status hinges on control, substitution, mutuality of obligation, and financial risk, which contractors must document to prove self-employment.
The full impact of the threshold changes may not apply until April 2027 due to the two-year financial assessment and nine-month filing period.
Contractors can use HMRC’s CEST tool and professional advisers to assess status, reducing the risk of costly HMRC investigations.
Businesses must confirm their size status and communicate clearly with contractors to avoid disputes or compliance issues.
Industry-specific challenges, like long-term IT projects, require tailored contracts to demonstrate outside IR35 status.
Group company structures complicate IR35 exemptions, requiring contractors to verify their client’s individual and group status.
Proactive preparation, including contract reviews and record-keeping, is essential to minimise HMRC penalties and maximise tax benefits.
FAQs
Q1: What is the definition of a small company under the new IR35 rules starting April 2025?
A1: A small company is defined as one meeting at least two of the following criteria for two consecutive financial years: annual turnover not exceeding £15 million, balance sheet total not exceeding £7.5 million, or an average of 50 or fewer employees.
Q2: How does a contractor know if their client qualifies as a small company under the new thresholds?
A2: Contractors should request written confirmation from their client, including details of their turnover, balance sheet, and employee count, and verify if the client meets the small company criteria for two consecutive years.
Q3: Can a contractor appeal an HMRC decision if they disagree with an IR35 status investigation outcome?
A3: Yes, contractors can appeal an HMRC decision by requesting a review within 30 days or escalating the case to a First-tier Tribunal for further adjudication.
Q4: What happens if a contractor incorrectly assesses their IR35 status as outside IR35?
A4: If HMRC determines the status was incorrectly assessed, the contractor may face backdated tax bills, interest at 7.75%, and penalties up to 30% of the unpaid tax.
Q5: Are there any tools available to help contractors assess their IR35 status?
A5: Contractors can use HMRC’s Check Employment Status for Tax (CEST) tool online, though it’s advisable to supplement this with professional advice for accuracy.
Q6: How does the IR35 change affect contractors working for public sector clients?
A6: The company size threshold changes apply only to private sector clients; public sector clients remain responsible for determining IR35 status regardless of size.
Q7: Can a contractor negotiate their contract to better align with outside IR35 criteria?
A7: Yes, contractors can negotiate terms like substitution clauses, flexible hours, or project-based deliverables to strengthen their case for outside IR35 status.
Q8: What are the penalties for businesses misclassifying their company size for IR35 purposes?
A8: Businesses misclassifying their size may face HMRC fines, repayment of unpaid taxes, and potential legal disputes with contractors over incorrect tax deductions.
Q9: How can contractors protect themselves from HMRC investigations?
A9: Contractors should maintain detailed records of contracts, working practices, and client communications, and consider professional indemnity insurance to cover potential disputes.
Q10: Does the IR35 exemption apply to contractors working through agencies?
A10: If the end client is a small company, the IR35 exemption applies, but agencies may still handle tax deductions if they’re the fee-payer in the supply chain.
Q11: Can a contractor claim expenses if deemed inside IR35?
A11: Inside IR35 contractors can claim limited expenses, such as travel or equipment, but these are subject to stricter HMRC rules compared to outside IR35 status.
Q12: How does the IR35 change impact limited company dividends?
A12: Outside IR35 contractors can pay themselves dividends, taxed at lower rates (8.75% to 39.35%), while inside IR35 contractors face PAYE and NICs, reducing dividend opportunities.
Q13: What role does professional indemnity insurance play in IR35 compliance?
A13: Professional indemnity insurance can cover legal costs and penalties if HMRC challenges a contractor’s IR35 status, offering financial protection during disputes.
Q14: Can a contractor work for multiple clients to strengthen their outside IR35 case?
A14: Yes, working for multiple clients demonstrates independence and reduces the likelihood of being seen as a disguised employee by HMRC.
Q15: How does the IR35 change affect contractors in the construction industry?
A15: Construction contractors may face challenges proving outside IR35 status due to on-site work, but clear contracts and evidence of financial risk can help.
Q16: What is the role of a Status Determination Statement (SDS) for medium/large companies?
A16: Medium and large companies must issue an SDS to contractors, detailing their IR35 status and reasoning, which contractors can appeal if they disagree.
Q17: Can a contractor use a previous contract as evidence for outside IR35 status?
A17: Yes, previous contracts showing self-employment practices, like substitution or lack of control, can support a contractor’s case, but current practices must align.
Q18: How do the IR35 changes affect contractors working remotely?
A18: Remote work can strengthen an outside IR35 case by showing less client control, but contractors must still meet other criteria like substitution and financial risk.
Q19: What happens if a client refuses to confirm their company size status?
A19: Contractors should assume the client is medium/large and request an SDS, or seek professional advice to avoid potential HMRC compliance issues.
Q20: Can a contractor switch from inside to outside IR35 mid-contract if the client becomes a small company?
A20: Contractors can reassess their status if the client becomes small, but must renegotiate contract terms and ensure working practices align with self-employment criteria.
About the Author
Mr. Maz Zaheer, FCA, AFA, MAAT, MBA, is the CEO and Chief Accountant of My Tax Accountant and Total Tax Accountants—two of the UK’s leading tax advisory firms. With over 14 years of hands-on experience in UK taxation, Maz is a seasoned expert in advising individuals, SMEs, and corporations on complex tax matters. A Fellow Chartered Accountant and a prolific tax writer, he is widely respected for simplifying intricate tax concepts through his popular articles. His professional insights empower UK taxpayers to navigate their financial obligations with clarity and confidence.
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