Autumn Budget: Higher IR35 Small Company Thresholds from 2026

The Autumn Budget confirmed a major change to the off-payroll working rules (IR35) that will come into effect from April 2026. The thresholds determining whether a business is classed as “small” — and therefore exempt from operating IR35 — will increase substantially.

These new limits mean more businesses will fall outside the off-payroll rules, shifting responsibility back to contractors to determine their own IR35 status. This is a significant development for organisations that rely heavily on contractors and for contractors themselves.

What Has Been Announced?

From April 2026, a business will qualify as a small company for IR35 purposes if it meets at least two of the following:

• Turnover up to £15 million
• Balance sheet total up to £7.5 million
• 50 employees or fewer (unchanged)

This is a substantial increase from the current Companies Act thresholds and will bring many more organisations into the small-company exemption.

What Does This Mean for IR35?

Under the off-payroll rules:

• Medium and large organisations must determine a contractor’s IR35 status
• Small organisations are exempt
• When exempt, contractors themselves must assess whether they are inside or outside IR35

From 2026, far more end clients will be treated as small, meaning:

• They will no longer be responsible for determining IR35 status
• Contractors revert to self-assessment
• HMRC oversight will shift more towards individual contractors rather than businesses

This change reverses much of the expanded compliance burden introduced in recent years.

Who Will Be Affected?

1. Organisations using contractors

Many businesses previously classified as “medium” will now fall into the “small” category.

This will mean:

• No requirement to issue Status Determination Statements
• No need to operate off-payroll payroll deductions
• Reduced compliance risk — but also less control over contractor tax status

2. Contractors

Contractors working with newly “small” clients will now be responsible for:

• Assessing their own IR35 status
• Ensuring they pay the correct tax
• Managing the increased HMRC scrutiny likely to follow

3. Agencies

Recruitment agencies may see changes to their own responsibilities where their clients qualify as small under the new rules.

4. HMRC

The shift will move enforcement towards individual contractors rather than end clients.

Why Is This Change Being Made?

The government aims to:

• Reduce administrative burdens on growing SMEs
• Simplify the IR35 regime for organisations near the margin of the threshold
• Support businesses that rely on flexible labour
• Shift enforcement efforts towards individuals rather than companies

This aligns with broader moves to encourage business growth while maintaining tax compliance.

Impact on Businesses Using Contractors

For companies:

• Compliance costs will reduce
• IR35 obligations will be significantly eased
• Contractor engagement may become more flexible
• There may be increased willingness to hire contractors again
• Internal IR35 processes could become redundant for many organisations

However, businesses must still ensure they understand the rules — misclassification or ignoring IR35 entirely can still create risk if thresholds are later breached.

Impact on Contractors

For contractors, the change is much more significant:

• They will once again be fully responsible for determining whether their contracts fall inside or outside IR35
• The risk of incorrect assessment shifts directly onto the individual
• HMRC is likely to increase compliance activity where responsibility has moved
• Contractors must maintain clear documentation, contracts, working practices and professional advice

Some may find the change beneficial (greater freedom), while others may face increased compliance burdens.

Planning Considerations for 2026

For Businesses

• Review whether the new thresholds will classify you as “small”
• Update contractor engagement processes
• Reassess whether IR35-based working restrictions can be relaxed
• Communicate changes to agencies and contractors
• Consider commercial and HR impacts of increased contractor flexibility

For Contractors

• Prepare to self-assess IR35 from 2026 for many engagements
• Review contracts and working arrangements
• Consider obtaining professional IR35 assessments
• Keep strong evidence of working practices
• Review whether your current business structure is still appropriate

Summary

The increase in IR35 small-company thresholds from 2026 represents a major shift for the contracting sector. With more businesses exempt from operating the off-payroll rules, responsibility will fall back onto contractors for determining their employment status.

For businesses, this reduces compliance burdens.
For contractors, it creates a renewed requirement for careful self-assessment and robust documentation.

Merranti Accounting can help both businesses and contractors understand their obligations and prepare ahead of the 2026 changes.