IR35 in 2026: Off-Payroll Rules, Small-Client Thresholds and a Worked Contractor Comparison

If you contract through your own limited company, or you hire people who do, IR35 decides how much tax the work really carries. This guide explains the off-payroll working rules as they stand in 2026: who makes the status decision, the small-client exemption (and why the April 2025 threshold rise hasn't changed most clients' status yet), status determination statements, HMRC's CEST tool, the deemed employment payment, and a worked comparison of what an £88,000 contract leaves you with inside and outside IR35.

Quick answer

IR35 (the off-payroll working rules) applies when you work through your own company but would be an employee if you were engaged directly. If the client is medium, large or public sector, the client decides your status and the fee-payer deducts PAYE tax and NI. If the client is small, your own company decides and, if caught, pays tax on a deemed employment payment.

• A private client is small unless it meets 2 of 3 tests: turnover over £10.2 million, balance sheet over £5.1 million, more than 50 employees

• The tests rise to £15 million and £7.5 million for financial years from 6 April 2025 — first changing status in 2027-28

• Clients must give you a status determination statement and answer a disagreement within 45 days

• Umbrella company PAYE failures can land on the agency from 6 April 2026

What IR35 is and who it affects

IR35 began in 2000 as a rule aimed at "disguised employment": a worker who leaves a job on Friday and returns on Monday doing the same work through a personal service company (PSC), paying themselves dividends rather than salary. The legislation now sits in two places in the Income Tax (Earnings and Pensions) Act 2003. Chapter 8 covers engagements with small private-sector clients, where the worker's own company is responsible. Chapter 10, the off-payroll working rules, covers public-sector clients and medium or large private-sector clients, which have had to make the status decision themselves since 6 April 2021 in the private sector.

The rules affect three groups. Contractors who supply their services through an intermediary, usually a limited company they own, are the obvious one. Clients that take on those contractors are the second, because a medium or large client must decide status and can end up paying the tax if it gets the process wrong. The third is the labour supply chain in between: recruitment agencies and anyone else who pays the contractor's company, called the fee-payer or deemed employer.

IR35 doesn't apply to sole traders invoicing in their own name, or to workers paid through an agency's payroll or an umbrella company, because they're already taxed as employees. If you're still choosing a structure, our sole trader vs limited company guide sets out the wider trade-offs, and what is a limited company explains how a PSC works.

Who decides your status: small, medium, large and public-sector clients

The single most important question in IR35 is the size of the end client, because it decides who carries the risk. A public-sector body always makes the decision itself, whatever its size. A private-sector or voluntary-sector client makes the decision only if it is medium or large. If the client is small, the decision passes back to your company, exactly as it did for everyone before the reforms.

For a company client, HMRC uses the Companies Act size tests. A company is medium or large if it meets at least two of the three tests for two consecutive financial years. HMRC looks at the last financial year whose accounts filing deadline passed before the tax year in question began. Employees are counted as the average of monthly headcounts of directly employed staff, not contractors. A brand-new company is treated as small in its first financial year, even if it belongs to a group, and parent companies of medium or large groups are caught under special group rules.

Non-company clients use a simpler single test. A partnership or other unincorporated organisation is medium or large if its turnover exceeds the turnover threshold for its last financial year ending at least nine months before the tax year. An individual running a business uses turnover for the last calendar year before the tax year starts. In both cases there's no balance sheet or employee test.

A small client has one duty: if you or an agency asks whether it's small, it must confirm its size. Get that confirmation in writing at the start of each engagement and each tax year, because a client can move from small to medium.

The small-company exemption thresholds: what changed in April 2025

The turnover and balance sheet limits went up for financial years beginning on or after 6 April 2025. Turnover rose from £10.2 million to £15 million and the balance sheet total from £5.1 million to £7.5 million. The employee test stayed at more than 50 employees.

Medium or large client tests (meet 2 of 3, two years running)

Test	Financial years before 6 April 2025	Financial years from 6 April 2025
Turnover	More than £10.2 million	More than £15 million
Balance sheet total	More than £5.1 million	More than £7.5 million
Average employees	more than 50 employees	more than 50 employees (unchanged)

Turnover

Financial years before 6 April 2025

More than £10.2 million

Financial years from 6 April 2025

More than £15 million

Balance sheet total

Financial years before 6 April 2025

More than £5.1 million

Financial years from 6 April 2025

More than £7.5 million

Average employees

Financial years before 6 April 2025

more than 50 employees

Financial years from 6 April 2025

more than 50 employees (unchanged)

Many explainers say a client with £12 million of turnover is now small. That isn't how the timing works. HMRC's manual says that for a company with a normal 12-month financial year, the earliest tax year in which the new figures can change its status is 2027-28. That's because the size test looks back at the accounts whose filing deadline passed before the tax year began, and the first accounts using the new figures are for years starting after 6 April 2025. For 2026-27, most clients are still sized using the old £10.2 million and £5.1 million tests.

A transitional rule smooths the change. In its first accounting period beginning on or after 6 April 2025, a company can look back at earlier years and treat itself as having met (or not met) the size conditions using the new thresholds. So a client that was medium under the old figures but small under the new ones can drop out of Chapter 10 at the first possible point instead of waiting two more years. Non-company clients still use the turnover test alone, so check their latest figures carefully.

In practice, mid-sized clients with turnover between £10.2 million and £15 million are the ones whose status may change from 2027-28. If one of your clients falls in that band, expect it to stop issuing status determination statements, and expect your own company to take back the status decision for that work.

How employment status is decided

There's no single statutory test. The courts look at the whole picture of a hypothetical contract directly between you and the client. Three factors carry most weight. Personal service: if you can genuinely send a substitute, and the client can't refuse one that's suitably qualified, that points away from employment. Control: if the client decides how, when and where you work, rather than just what you deliver, that points towards employment. Mutuality of obligation: an ongoing duty for the client to offer work and for you to accept it is typical of employment.

Other factors fill in the picture: whether you carry real financial risk (fixing defective work at your own cost, fixed-price deliverables), whether you provide your own equipment, whether you're integrated into the client's organisation (line-managing staff, appearing on organisation charts), and whether you're in business on your own account with several clients, marketing and insurance. A tidy contract won't help if the working reality contradicts it; tribunals routinely set aside substitution clauses that were never used or never workable.

CEST: HMRC's status tool

HMRC's Check employment status for tax (CEST) tool asks a series of questions about the engagement and gives HMRC's view of whether the rules apply. HMRC says it will stand by the result as long as the information you enter is accurate and follows its guidance. That protection is real but narrow: it falls away if your answers don't match the actual arrangements, and CEST can return "unable to determine" on borderline cases. Print or save the result and the answers each time the engagement changes. Many clients use CEST alongside their own reviews, but CEST doesn't take account of every factor a tribunal would weigh, such as being in business on your own account.

Status determination statements and disagreements

When a medium, large or public-sector client decides status, it must issue a status determination statement (SDS). The SDS has to give the conclusion and the reasons for reaching it, and it must go to you and to whoever the client contracts with, usually an agency. The client must take reasonable care in reaching its decision, which HMRC reads as considering the specific engagement, not issuing a blanket inside decision for every contractor in a department.

How the client-led process works

1. 1

   Client checks its own size

   A private-sector client applies the two-of-three test to its last relevant accounts. If small, it tells you and the rest of the chain; your company handles status.

2. 2

   Client assesses the engagement

   It looks at the role and the working practices, often using CEST, and reaches a conclusion with reasons.

3. 3

   SDS issued down the chain

   The SDS goes to you and to the party the client contracts with. Until it does, the client is liable for the tax and NI.

4. 4

   Fee-payer operates PAYE if inside

   The party paying your company deducts Income Tax and employee NI, and pays employer NI and any Apprenticeship Levy.

   Tip: Your company receives the net amount and doesn't pay Corporation Tax on it.

5. 5

   You can disagree

   Send your reasons to the client. It must reply within 45 days with either reasons for keeping its decision or a new SDS.

If you think the SDS is wrong, gather evidence first: the contract, any substitution you've actually used, examples of how you decide working methods, proof of other clients, insurance and business marketing. Write to the client setting out the factors point by point. While the disagreement runs, the original decision keeps applying. If the client misses the 45 days deadline, the tax and NI liability moves to the client, which gives clients a strong reason to respond properly. The disagreement process is internal to the client; there's no appeal to HMRC at this stage.

If the fee-payer gets it wrong and HMRC later investigates, a set-off introduced from 6 April 2024 lets HMRC reduce the deemed employer's bill by the tax already paid by the worker and their company. That includes Corporation Tax, PAYE on salary and Income Tax on dividends, but not employer NI paid by the PSC. Once a set-off is given, the worker and company can't reclaim the same tax.

Inside IR35: how the fee-payer taxes your invoices

When the client says the rules apply, the fee-payer treats each payment to your company as a deemed direct payment of employment income. It deducts PAYE Income Tax and employee National Insurance at your normal rates and sends your company the net amount. It also pays employer NI at 15% above the £5,000 secondary threshold and, if its paybill is large enough, the Apprenticeship Levy. Student and postgraduate loan repayments aren't deducted; you settle those through Self Assessment.

Your company doesn't pay Corporation Tax on income the fee-payer has already taxed this way, and the rules stop the same money being taxed a second time when the company passes it on to you. You can't claim the expenses a self-employed person could. Employer NI is legally the fee-payer's cost, but in practice many agencies quote lower inside-IR35 day rates to absorb it, which is why the worked example below shows two inside scenarios.

Rates used for inside-IR35 deductions (2026-27)

15%

Employer NI

Above £5,000 a year

8%

Employee NI

Between £12,570 and £50,270

2%

Employee NI

Above £50,270

£12,570

Personal Allowance

Before any taper over £100,000

Worked example: an £88,000 contract inside and outside IR35

Priya, an IT contractor in England, invoices £400 a day for 220 days: £88,000 a year (VAT aside). She has no other income. All figures use 2026-27 rates: Income Tax 20% and 40% with a £12,570 Personal Allowance, employee NI 8% and 2%, employer NI 15% above £5,000, dividend rates 10.75% and 35.75%, and Corporation Tax with marginal relief.

Outside IR35. Her company pays £3,000 of running costs (accountant, insurance, software) and a £12,570 salary. Employer NI on the salary is £1,135.50; as the sole employee-director she can't claim the Employment Allowance. Taxable profit is £71,294.50. Corporation Tax at 25% less marginal relief is £15,143.04, leaving £56,151.46, which she takes as dividends. £500 is tax-free, £37,200 is taxed at 10.75% (£3,999) and £18,451.46 at 35.75% (£6,596.40). Take-home: £58,126.

Inside IR35, employer NI on top. The fee-payer pays employer NI of £12,450 on top of the £88,000. Priya pays £22,632 Income Tax and £3,770.60 employee NI. Take-home: £61,597.

Inside IR35, same total cost to the client. If the agency cuts the rate so that pay plus employer NI equals £88,000, her gross pay is £77,173.91. She pays £18,301.57 Income Tax and £3,554.08 NI. Take-home: £55,318.

Two lessons come out of this. First, the April 2025 employer NI rise and the April 2026 dividend rate rise have narrowed the gap between inside and outside IR35 for many contractors; outside isn't automatically "worth 20% more" any more. Second, the rate negotiation matters as much as the status: ask the agency in writing whether an inside rate is quoted before or after employer NI. Our hourly rate calculator helps you turn a target take-home into a day rate, and the dividend tax guide shows the salary-plus-dividends maths in more detail.

The outside figure also assumes Priya pays out every pound of post-tax profit. In reality, many directors leave some profit in the company or pay employer pension contributions, which carry neither NI nor dividend tax. That flexibility is one of the real advantages of working outside IR35.

Small clients: the deemed employment payment

When your client is small, your company decides whether the hypothetical-employment test is met. If it is, your company must calculate a deemed employment payment for the tax year and pay PAYE tax and NI on it as if it had been salary. HMRC's step-by-step method starts with everything the company received for the engagement and deducts a flat 5% for general running costs, with no evidence needed.

Deemed employment payment in outline

Step 1

Fees received for the engagement

Step 2

Less flat 5%

No receipts needed

Step 3

Less allowable expenses, capital allowances and pension contributions

Step 4

Less salary already paid and its employer NI

Step 5

Less employer NI on the deemed payment

Step 6

Deemed payment

Taxed as earnings

Suppose a small-client engagement brings in £60,000. The flat allowance is £3,000. Your company paid £1,500 of qualifying travel, an employer pension contribution of £5,000 and a salary of £12,570 with £1,135.50 employer NI. What's left (£36,794.50) represents the deemed payment plus its own employer NI, so the deemed payment is about £31,995 (that figure divided by 1.15), and PAYE tax and NI are due on it. HMRC expects the deemed payment to be reported on a Full Payment Submission on or before 5 April. If you can't finalise it in time, a provisional figure by 5 April lets you correct it by the following 31 January.

Because the deemed payment is taxed as earnings, your company can deduct it (and its employer NI) for Corporation Tax, and dividends later paid out of the same income can be relieved so the money isn't taxed twice. This is fiddly, and most PSCs caught under Chapter 8 use an accountant to run it.

Umbrella companies and agencies from April 2026

From 6 April 2026, if an umbrella company in a labour supply chain fails to pay over the PAYE it deducts, HMRC can recover it from the recruitment agency that supplied the worker. Where there's no agency and the end client contracts directly with the umbrella, the end client is liable. This doesn't change IR35 itself, but it changes how agencies and clients behave: expect more due diligence on umbrella payslips and, for some clients, a preference for engaging contractors through their own companies with a clear SDS, or through agency PAYE. See our agency workers guide for the employment-rights side.

Common IR35 mistakes and how to avoid them

Before you sign (or renew) an engagement

0/7

• Get the client's size confirmed in writing for this tax year
• If medium or large, ask for the SDS before you start, and read the reasons
• Check that the contract's substitution and control clauses match how you'll actually work
• Run CEST with accurate answers and save the result
• Ask whether an inside rate is quoted before or after employer NI
• Keep evidence you're in business on your own account: other clients, insurance, website
• Diary 6 April each year to recheck the client's size and your working practices

Share Print

The commonest mistake is assuming a client is small because it feels small, or because the turnover headlines say £15 million. The second is accepting a blanket inside decision without using the disagreement process; it costs nothing and puts the client on a 45 days clock. The third, for small-client work, is never doing the Chapter 8 assessment at all. HMRC can raise assessments years later, with interest and penalties, on top of the Corporation Tax and dividend tax you've already paid.

Clients make mirror-image errors: issuing an SDS without reasons, applying one decision to a whole role group without looking at individuals, and failing to tell the agency. Each of those can move the liability onto the client.

Watch the Budget on 28 October 2026

The Autumn Budget is on 28 October 2026. IR35 itself isn't subject to any announced change, but the figures that drive the comparison above often are: National Insurance thresholds, dividend rates and Corporation Tax. Any change to dividend tax would also move the outside-IR35 numbers. We'll update this page after the Budget; until then, treat the 2026-27 calculations as current.

Official links

• Understanding off-payroll working (IR35)Overview and who is responsible
• Off-payroll working for clientsSDS, reasonable care, disagreements
• Check employment status for tax (CEST)HMRC's status tool
• ESM10006A: new size thresholds£15m / £7.5m and transitional rules
• Calculate the deemed employment paymentSmall-client engagements
• Umbrella company PAYE changesFrom 6 April 2026

What to do next

List every live engagement, note the client's size and who made the status decision, and diary a review for each renewal and each 6 April. If a client sits between £10.2 million and £15 million of turnover, ask now how it will treat contractors from 2027-28. For the company side of the numbers, read our Corporation Tax guide and employer National Insurance guide, and use the budget planner to set aside tax from each invoice.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What is IR35 in simple terms?

IR35 is the nickname for the UK off-payroll working rules. They apply when a contractor works through their own limited company but, if you strip the company out, the relationship looks like employment. When the rules apply, Income Tax and National Insurance are due broadly as if the contractor were an employee. Who decides and who pays depends on whether the client is small, medium, large or public sector.

Is my client small enough to be exempt from the client-led IR35 rules?

A private-sector company client is small if it doesn't meet two or more of these tests: turnover over £10.2 million, balance sheet over £5.1 million, more than 50 employees. The turnover and balance sheet figures rose to £15 million and £7.5 million for financial years starting on or after 6 April 2025, but for a normal 12-month year that only changes a client's status from 2027-28.

What is a status determination statement?

A status determination statement (SDS) is the client's written decision on whether the off-payroll rules apply to an engagement, with the reasons. Medium, large and public-sector clients must give it to the worker and to whoever they contract with. If they don't give reasons, or don't take reasonable care, the client can become liable for the tax and National Insurance.

Can I challenge an inside IR35 decision?

Yes. Tell the client you disagree and why, with evidence such as your contract, substitution rights and how you actually work. The client must respond within 45 days, either confirming its decision with reasons or issuing a new SDS. If it misses the deadline, it takes on liability for the tax and NI. You can raise a disagreement until the last payment for the engagement.

Will HMRC accept the result of the CEST tool?

HMRC says it will stand by the result of its Check employment status for tax (CEST) tool as long as the information you enter is accurate and follows its guidance. Keep a copy of the result and the answers you gave. If the real working arrangements differ from what you entered, the result gives no protection.

How much less do I take home inside IR35?

It depends on the day rate and how the fee-payer treats employer NI. In our example on an £88,000 contract, a worker outside IR35 taking a £12,570 salary and dividends keeps about £58,100. Inside IR35, take-home is about £61,600 if employer NI is paid on top of the fee, but about £55,300 if the rate is cut so the client's total cost stays at £88,000.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 9 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Understanding off-payroll working (IR35) — HMRC / GOV.UK · accessed 9 October 2026
2. 2.April 2021 changes to off-payroll working for clients — HMRC / GOV.UK · accessed 9 October 2026
3. 3.ESM10006 — medium or large-sized non-public sector organisations — HMRC Employment Status Manual · accessed 9 October 2026
4. 4.ESM10006A — changes to size thresholds from 6 April 2025 — HMRC Employment Status Manual · accessed 9 October 2026
5. 5.Check employment status for tax (CEST) — HMRC / GOV.UK · accessed 9 October 2026
6. 6.How to calculate the deemed employment payment — HMRC / GOV.UK · accessed 9 October 2026
7. 7.ESM8140 — how to calculate the deemed payment: step by step — HMRC Employment Status Manual · accessed 9 October 2026
8. 8.Off-payroll working (IR35): calculation of PAYE liability in cases of non-compliance — HMRC policy paper · accessed 9 October 2026
9. 9.Umbrella company market: changes to Income Tax rules to tackle non-compliance — HMRC policy paper · accessed 9 October 2026
10. 10.Corporation Tax rates — HMRC / GOV.UK · accessed 9 October 2026