IR35: Increase in financial thresholds for “small” client company

HMRC has confirmed that the upcoming increase in company size thresholds will apply to the off-payroll working rules.

From 6 April 2026, more end-client companies will qualify as “small” and fall outside of the scope of the IR35 Off-Payroll Working (OPW) regime.

What it means to be IR35-exempt

A company that is IR35-exempt does not have to apply the OPW rules, when engaging contractors who operate through their own limited companies.

This means the client is not required to decide the contractor’s IR35 status or make tax deductions at source.

The responsibility for determining whether an engagement is inside or outside IR35 instead reverts to the contractor’s company.

Meeting the company size criteria

The clarification follows changes introduced in April 2025, under the Companies Act 2006.

Effective for financial years beginning on or after 6 April 2025, the turnover threshold for a small company will rise from £10.2 million to £15 million and the balance sheet total from £5.1 million to £7.5 million.

For IR35 rules, a company’s size is determined by its previous financial year end therefore the impact will only be seen post April 2026.

The employee threshold will remain at an average of 50 per month. Meeting any two of these three criteria will classify a company as small. A company will be considered medium or large if two of these thresholds are breached for at least two consecutive financial years.

The updated thresholds are believed to better reflect inflation and business growth.

HMRC’s clarification means that around 14,000 companies currently defined as medium-sized will be reclassified as small come 6 April 2026.

How to prepare for April 2026

End-clients should confirm and communicate their company size status to agencies and contractors well in advance, because IR35 responsibilities depend entirely on that status.

Communicating company size early helps all parties:

• Apply the correct IR35 procedure from the outset
• Avoid disputes over who is responsible for deductions and liabilities
• Ensure consistency across the supply chain
• Reduce the risk of retrospective HMRC challenges

Misunderstandings about a company’s size could lead to incorrect tax treatment, non-compliance and potential financial penalties.

The news is likely to be welcomed by contractors as well, as it will potentially allow more of them to operate outside of IR35.

Speak to our team for advice on how you can remain compliant when the new thresholds take effect in April 2026.

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