SNIPEF

On 6 April, 2025, new company size thresholds were introduced by the UK Government, which saw the definition of micro, small and medium-sized businesses change. 

The contracting sector has experienced a significant amount of change over the last 5 years – most recently with the introduction of IR35 offset in April 2024 – and the updates to company size thresholds have the potential to impact both contractors and end clients. 

What has changed with IR35? 

Company Size Thresholds Raised 

The main change that has come into force is the rise in company size threshold. Under the current IR35/Off-Payroll Working (OPW) rules (Chapter 10, ITEPA 2003), medium and large companies are responsible for determining the employment status of contractors who work through a Personal Service Company (PSC). If the contractor is deemed an employee for tax purposes, the company must deduct Income Tax and NICs. 

Small companies on the other hand are exempt from OPW rules, and instead the tax responsibility stays with the contractor’s PSC under Chapter 8, ITEPA 2003 (the original IR35 rules). 

The new change sees the threshold of what is considered a small and medium business raised, which will now classify some medium businesses as considered small - meaning that they will now be exempt from the OPW rules. 

So, what are the new thresholds? 

* i.e. total assets 

Who will it impact and when? 

The new size thresholds mean that some companies that were previously classed as small will now be micro entities and those that were classed as medium will now qualify as small. In fact, government estimates suggest that approximately 113,000 companies and Limited Liability Partnerships will move from small to micro-entity status, and around 14,000 will move from medium-sized to small. 

Generally speaking, this is positive news for the contracting sector. Since the update to off-payroll legislation in April 2021, which saw the requirement for assessing an engagement (and thus the associated tax liability for the engagement) move to the fee-payer, many end clients have been reluctant to offer outside IR35 roles to contractors for fear of HMRC classifying the engagement as being ‘inside’ IR35. This has led to fewer contracting roles being available. 

The reclassification of company sizes is likely to widen the pool of opportunities for contractors, as there is more of an incentive for businesses newly classified as small to work with contractors, as the IR35 engagement determination will lie with the contractor. This means the small businesses would no longer be liable for the additional costs of operating under the OPW rules, which include tax and NICs responsibilities, as it would fall to the contractor. 

However, it is important to note that these changes do not have an immediate practical effect from an off payroll working perspective. In the HMRC Agent Update, a company must meet the new thresholds for two consecutive financial years to be considered exempt from the previous off payroll working rules. 

Due to transitional provisions, companies can assume that the new thresholds applied in the previous financial year; therefore, the earliest that these changes can have a practical impact on IR35/OPW responsibilities is 6 April 2026. 

How can those that will be affected prepare for the change? 

While there is not a lot to physically do to prepare for this change, companies should speak to their accountants for specific advice on how it will impact them and who they conduct business with.  

Contractors should speak to their existing clients to establish if they are/will be affected by the new threshold changes, and consider the impact this will have on their engagement with the client. If the responsibility for determining the engagement will fall to the contractor in the future, the contractor should consider having an IR35 contract review to ensure they do not fall foul of the off payroll legislation, and consider what changes they may need to make to their day rate (if they had previously been working on-payroll or through an umbrella company). 

On the impact of the changes, Danny Batey, Senior Tax Consultant at our specialist tax consultancy business Markel Tax, says: “It is hoped that the new changes to the company size thresholds will have a positive effect on the contractor market, although the impact will not be immediate, by allowing contractors that engage with the increased number of small companies, due to the threshold changes, to decide their own IR35 status.  

“For contractors that find themselves in this position, it is essential that they seek specialist advice with regards to their contractual terms and conditions and working practices, so they do not leave themselves exposed to a future HMRC IR35 challenge.” 

For more information and guidance, visit the Markel Direct website.