If you’re an off-payroll contractor operating through a personal service company (PSC), there are some important changes coming your way. The government has updated the financial thresholds that determine whether a company is considered micro, small, medium, or large. This means more companies (AKA clients, intermediaries and PSCs) will now be classified as ‘small’, which could shake things up for how IR35 applies to you.
What’s changing?
The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 have raised the financial thresholds for company size classifications. This means some companies that were previously considered ‘medium-sized’ will now be reclassified as ‘small’.
Under IR35, medium and large businesses must assess contractors’ employment status and handle tax and National Insurance contributions accordingly. But small businesses are exempt from these rules—meaning the responsibility for IR35 shifts back to the contractor’s PSC.
With these new thresholds, more companies will fall under the ‘small’ category. So, if you’re working with one of these companies, it will once again be your responsibility to determine whether you fall inside or outside IR35 and handle the necessary tax arrangements through your PSC.
The new company size thresholds and when they start
According to Rebecca Seeley Harris, an Off-Payrol and IR35 expert who posted on LinkedIn, “A company’s size is determined by reference to its previous financial year end and for the duration of a tax year. The company size threshold changes, therefore, will have no practical impact for off-payroll working until 1 April 2026 at the earliest.”
“In order to establish whether the company you are working with is ‘small’ you can put in a formal request. The company then has 45 days to respond,” she stated.
Company size is based on two out of three criteria:
Annual turnover, balance sheet total (total assets) and average number of employees
Here are the updated thresholds. For group companies, the limits are slightly higher:
| Company Size | Annual Turnover (\£) | Balance Sheet Total (\£) | Employees |
| Micro | Up to 1 million | Up to 500,000 | Up to 10 |
| Small | Up to 15 million | Up to 7.5 million | Up to 50 |
| Medium | Up to 54 million | Up to 27 million | Up to 250 |
| Large | Over 54 million | Over 27 million | Over 250 |
What does this mean for you as a contractor?
IR35 responsibility shifts back to you – If the client you work for is now classed as ‘small’, they no longer have to apply IR35 rules. This means it’s down to you and your PSC to decide if you’re inside or outside IR35 and pay tax accordingly.
- Potential cost savings – If your PSC itself moves into a smaller category, you might benefit from reduced reporting obligations
- No mandatory audits – If your PSC qualifies as a small company, you won’t need to undergo mandatory audits, saving both time and money
- Simplified financial reporting – Smaller companies can file abridged financial statements, cutting down on paperwork and admin time
- Less red tape – Some reporting requirements in the Directors’ Report have been removed, making life easier for PSC owners
What should you do next?
Check if your clients are now classed as small businesses under the new rules—this determines if IR35 shifts back to you.
- Review your own PSC’s status—if your business now qualifies as ‘small’, you might benefit from reduced admin and reporting
- Stay compliant—HMRC will still expect you to assess and apply IR35 correctly if it’s now your responsibility again
The bigger picture
The government expects these changes to cost the Exchequer around £20 million per year from 2026/27, since more companies will avoid IR35 obligations. However, for contractors, this means a return to self-assessment of IR35.
Commenting, Dave Chaplin, CEO of IR35 compliance firm IR35 Shield and contractor campaigner on IR35 and its impact said:
Whilst reducing regulatory burdens is good for business, regarding the impact on off-payroll working, this regulatory change is negligible. The Treasury’s own figures show it will cost just £20m annually from 2026/27 – a reduction of a mere 1.1% of the reported £1.8bn tax collected as a result of OPW.
Let’s be clear: the number of contractors that this may benefit is minimal and the fundamental challenges with IR35 remain, continuing to impede the flexibility of Britain’s independent workforce.
The off-payroll rules continue to force contractors into suboptimal quasi-employment models and place an unnecessary burden on UK enterprises.
If Labour wants meaningful change that produces growth, they need to address IR35 itself, not just adjust reporting thresholds.
You can read the Memorandum here.
DISCLAIMER
This article is for information purposes only and does not constitute professional advice.
