Quick Answer
The IR35 small company threshold rises to £15m turnover and £7.5m balance sheet from 6 April 2026. A company meeting two of those three criteria (including the unchanged 50-employee limit) is exempt from the off-payroll working rules, and contractors must self-assess their own IR35 status.
What Is the IR35 Small Company Exemption?
The off-payroll working rules, commonly known as IR35, place the responsibility for assessing a contractor's employment status on the end client rather than the contractor's own Personal Service Company (PSC). This has applied to medium and large private sector companies since April 2021.
Small companies have always been exempt. When a client qualifies as small, the original IR35 rules under Chapter 8 of ITEPA 2003 apply instead of the off-payroll Chapter 10 rules. That means the contractor's PSC assesses its own status and carries the tax risk, not the client.
The definition of "small" is tied to the Companies Act size criteria: meeting two of three thresholds covering turnover, balance sheet total, and employee headcount. Until 5 April 2026, those figures had not been updated since 2013. From 6 April 2026, they have increased substantially.
For a full explanation of the off-payroll working framework and how status determinations work in practice, the IR35 guide for UK agency owners covers the end-to-end process, including how agencies fit into the contractor supply chain.
The New IR35 Small Company Threshold from 6 April 2026
From 6 April 2026, a company is classified as small for IR35 purposes if it meets at least two of the following three criteria, assessed against its most recently completed financial year:
- Annual turnover of no more than £15 million (previously £10.2 million)
- Balance sheet total of no more than £7.5 million (previously £5.1 million)
- No more than 50 employees (unchanged)
HMRC estimates approximately 14,000 companies are reclassified as small as a result. The authoritative GOV.UK guidance is at Understanding off-payroll working (IR35), with the detailed threshold rules in the HMRC Employment Status Manual at ESM10006A.
IR35 Small Company Turnover Threshold 2026
IR35 Small Company Balance Sheet Threshold 2026
IR35 Small Company Employee Limit
Has My Client Become Small Under IR35? How to Check
The IR35 small company threshold 2026 change raises a specific practical question for every contractor: do any of your current clients now qualify as small?
The check is straightforward in principle. Look at your client's most recently filed accounts before the start of the 2026/27 tax year. Do those accounts show turnover below £15m? A balance sheet total below £7.5m? Fewer than 50 employees? If any two of those three are true, the client is small for IR35 purposes in 2026/27.
Under the off-payroll working rules, you have a formal right to request written confirmation of your client's size. The client must respond within 45 days. If a client tells you they are now small and therefore no longer required to issue a Status Determination Statement, ask them to confirm it in writing and specify which financial year's accounts support the classification. Without written confirmation, treat the engagement as subject to the off-payroll rules.
Use the IR35 status checker to assess your own position while you're at it. If a client becomes small and responsibility shifts to you, know whether the engagement would be inside or outside IR35 before you stop relying on the client's previous SDS. Check your IR35 status before the client's classification changes take effect.
What Changes When a Client Reclassifies as Small?
Once a client qualifies as small, three things change for that engagement:
- No SDS required. The client no longer needs to issue a Status Determination Statement before work begins. Any existing SDSs from that client no longer govern the engagement going forward.
- Responsibility shifts to your PSC. You assess your own IR35 status under Chapter 8 of ITEPA 2003. If the engagement is inside IR35, your PSC must operate PAYE and pay employer National Insurance contributions.
- The fee payer is released from source deduction. If you work through an agency in the supply chain, the agency no longer deducts PAYE and NIC at source for that engagement. Payment flows to your PSC gross.
What does not change: IR35 itself still applies. A small client exemption from the off-payroll rules does not make the engagement automatically outside IR35. The three employment status tests, mutuality of obligation, control, and right of substitution, apply in exactly the same way. You carry the risk of a wrong assessment, not the client.
The updated HMRC CEST tool is the standard starting point for self-assessing your status. Run the tool with accurate answers about the actual working arrangement, document the result, and keep that record.
The April 2027 Timing Trap: Why Most Changes Take Longer Than Expected
Most commentary about the IR35 small company threshold 2026 change stops at "£15m from April 2026." What it misses is the prior-year timing rule, and that has significant practical consequences for contractors.
Company size for off-payroll working purposes is assessed against the financial year immediately before the relevant tax year, not the current one. That means:
- For the 2026/27 tax year (6 April 2026 to 5 April 2027), a client's size is based on the financial year ending in 2025
- For the 2027/28 tax year, size is based on the financial year ending in 2026
Example: client with a 31 December 2025 year end, turnover £12m
Under the old £10.2m threshold, this client was medium-sized and issued SDS. Under the new £15m threshold, they would be small. Their accounts for the year ending 31 December 2025 are the ones assessed for the 2026/27 tax year. Those accounts show £12m turnover, which is below the new £15m limit. Result: this client reclassifies as small from 6 April 2026, and contractors working with them can self-assess from that date.
Where most contractors get the timing wrong
A client with a 31 March year end and £12m turnover uses their accounts ending 31 March 2025 for the 2026/27 classification. Those accounts were prepared and filed before the new £15m threshold came into effect. The client shows £12m turnover, which under the new rules would be small. Whether they reclassify depends on which year's accounts HMRC uses and whether the new thresholds apply retrospectively to prior-year accounts. In most cases, for clients with a March or December year end, the practical change arrives in April 2027, when the 2027/28 classification is based on their 2025/26 or 2026 accounts prepared under the new regime. If you are unsure, request written confirmation from the client and do not assume reclassification until you have it.
What UK Agency Owners and Contractors Need to Do Now
The IR35 small company threshold 2026 changes create a compliance review point, not a sweeping immediate shift. Here is a practical checklist:
- List every engagement currently subject to the off-payroll rules. For each client, identify their financial year end and most recently filed accounts.
- Apply the two-of-three test with the new thresholds. Turnover under £15m, balance sheet under £7.5m, or fewer than 50 employees. If two apply, the client may now be small for the 2026/27 tax year.
- Request written confirmation from potentially-small clients. Under the off-payroll rules, clients must respond within 45 days. Do not change your compliance approach until you have that confirmation in writing.
- Self-assess your IR35 status for newly-small client engagements. Run the HMRC CEST tool and document the result. Being exempt from Chapter 10 does not mean you are outside IR35.
- Update your contracts. If an engagement has shifted to small company status, the client's previous SDS is no longer operative. Your engagement terms should confirm that the contractor's PSC is responsible for the IR35 assessment.
- Do not assume April 2026 means immediate change for every client. The prior-year accounts rule means most contractors with December or March year-end clients will not see practical reclassification until April 2027.
Contractor compliance and IR35 should be part of every limited company director's annual tax review. Our annual tax review checklist for directors includes IR35 prompts alongside salary, dividend, and corporation tax planning.
Frequently Asked Questions
What is the IR35 small company threshold in 2026?
From 6 April 2026, a company qualifies as small for IR35 off-payroll working purposes if it meets at least two of three criteria: annual turnover of no more than £15 million (raised from £10.2 million), balance sheet total of no more than £7.5 million (raised from £5.1 million), and no more than 50 employees. The 50-employee limit is unchanged. Size is assessed against the company's most recently completed financial year before the start of the relevant tax year.
Has my client become small under IR35 after April 2026?
Check two things. First, does your client meet at least two of the new thresholds: under £15m turnover, under £7.5m balance sheet, or fewer than 50 employees? Second, do those figures come from their most recently filed accounts before the 2026/27 tax year? Under the off-payroll working rules, contractors can formally request written confirmation of a client's size, and the client must respond within 45 days. If a client claims to have become small, ask for written confirmation specifying which financial year's accounts support that classification.
What changes when a client is classified as small for IR35?
When a client is classified as small, the off-payroll working rules (Chapter 10 of ITEPA 2003) no longer apply to that engagement. The client no longer needs to issue a Status Determination Statement. The contractor's own PSC (Personal Service Company) becomes responsible for assessing IR35 status under the original rules in Chapter 8 of ITEPA 2003. If the engagement is inside IR35, the PSC must operate PAYE and pay employer National Insurance contributions. The fee payer in the supply chain is also released from the obligation to deduct PAYE at source.
When does the IR35 small company threshold change actually take effect?
The new thresholds are law from 6 April 2026, but in practice most contractors will not see any change until April 2027. Company size for off-payroll working purposes is determined by the accounts for the financial year immediately before the relevant tax year. For a client with a 31 March or 31 December year end, the accounts reviewed for the 2026/27 tax year are those for the year ending March 2025 or December 2025, which were prepared under the old thresholds. Only clients whose financial year ended between April and December 2025 and whose accounts meet the new £15m limit reclassify from 6 April 2026.
Do I still need to assess IR35 if my client is now a small company?
Yes. A small client exemption from the off-payroll working rules does not mean IR35 no longer applies. The original IR35 rules under Chapter 8 of ITEPA 2003 still apply to engagements with small clients. If the working arrangement would make you an employee but for the PSC, the engagement is inside IR35 and tax is due. You, as the contractor, are responsible for making that assessment and paying any tax. The three key employment status tests -- mutuality of obligation, control, and right to substitute -- apply in exactly the same way as they do for medium and large client engagements.
How Alto Can Help
Alto Accounting is an ACCA registered practice specialising in UK agencies and limited company contractors. We help agency founders and freelancers work through IR35 assessments, review contractor supply chains, and stay on the right side of the off-payroll working rules as they continue to evolve.
If you are unsure whether a client has become small, whether an engagement is inside or outside IR35, or whether your PSC is operating PAYE correctly, book a free consultation to talk it through.