HMRC has confirmed that the upcoming increase in company size thresholds will apply to the off-payroll working rules.
From 6 April 2026, more end-client companies will qualify as “small” and fall outside of the scope of the IR35 Off-Payroll Working (OPW) regime.
What it means to be IR35-exempt
A company that is IR35-exempt does not have to apply the OPW rules, when engaging contractors who operate through their own limited companies.
This means the client is not required to decide the contractor’s IR35 status or make tax deductions at source.
The responsibility for determining whether an engagement is inside or outside IR35 instead reverts to the contractor’s company.
Meeting the company size criteria
The clarification follows changes introduced in April 2025, under the Companies Act 2006.
From the 2026–27 tax year, the turnover threshold for a small company will rise from £10.2 million to £15 million and the balance sheet total from £5.1 million to £7.5 million.
The employee threshold will remain at an average of 50 per month. Meeting any two of these three criteria will classify a company as small.
The updated thresholds are believed to better reflect inflation and business growth.
HMRC’s clarification means that around 14,000 companies currently defined as medium-sized will be reclassified as small come 6 April 2026.
How to prepare for April 2026
End-clients should confirm and communicate their company size status to agencies and contractors well in advance, because IR35 responsibilities depend entirely on that status.
Communicating company size early helps all parties:
- Apply the correct IR35 procedure from the outset
- Avoid disputes over who is responsible for deductions and liabilities
- Ensure consistency across the supply chain
- Reduce the risk of retrospective HMRC challenges
Misunderstandings about a company’s size could lead to incorrect tax treatment, non-compliance and potential financial penalties.
The news is likely to be welcomed by contractors as well, as it will potentially allow more of them to operate outside of IR35.
