IR35 2026/27: Small Company Threshold Changes Explained

Every contractor running their own limited company has heard of IR35. Fewer have heard that the rules just moved — not because HMRC rewrote them, but because Companies House quietly redrew the line for what counts as a "small" business.

From 6 April 2026, that redrawn line means a meaningful chunk of contractors get something back that many of them lost in 2021: the right to decide their own IR35 status.

Here's what actually changed, why it happened almost by accident, and what to do if it affects you.

A quick refresher on how off-payroll working works

If you provide your services through your own limited company — a personal service company, or PSC — to an end client, IR35 (formally the "off-payroll working rules," or OPW) decides whether HMRC treats that engagement as genuine self-employment or as disguised employment.

Two different sets of rules can apply, and which one applies depends entirely on the size of the client you're working for:

Chapter 10 applies when your end client is a medium or large private-sector organisation (or any public-sector body). The client is legally responsible for deciding your IR35 status and must issue you a Status Determination Statement (SDS). If they decide you're "inside IR35," the fee-payer deducts tax and National Insurance as if you were an employee — before the money even reaches your company.
Chapter 8 applies when your end client is a "small" company as defined by the Companies Act 2006. Here, the old rules still apply: you decide your own IR35 status, and you carry the risk if HMRC later disagrees.

Working for a small client under Chapter 8 has always been the more favourable position for a contractor — not because the underlying test of employment status changes, but because you keep control of the decision and the paperwork trail.

The change: what "small" means just got bigger

The definition of a "small company" comes from company law, not tax law, and it's set out in the Companies Act 2006. A company qualifies as small if it meets at least two of these three thresholds:

Threshold Old limit New limit Annual turnover £10.2 million £15 million Balance sheet total £5.1 million £7.5 million Average employees 50 50 (unchanged)

The new turnover and balance sheet limits apply to company accounting periods starting on or after 6 April 2025. Because a client's size for off-payroll purposes is worked out by reference to its two most recent financial years, the effect on IR35 status doesn't land until the 2026/27 tax year — from 6 April 2026 onwards.

The upshot: companies that were previously "medium" — too big for Chapter 8, subject to the full SDS process — can now qualify as "small" under the new thresholds. Estimates put the number of companies reclassifying this way at around 14,000. If your end client is one of them, responsibility for your IR35 determination shifts from them back to you.

Why this actually matters to you

If your client moves from medium to small:

They stop being required to issue you a Status Determination Statement.
They stop carrying the risk (and the paperwork burden) of getting your status wrong.
You go back to self-assessing your IR35 status under Chapter 8, which means keeping your own evidence of why an engagement is genuinely outside IR35 — substitution rights, control over how and when you work, financial risk, and so on.
If you (correctly or not) determine yourself to be inside IR35, you're responsible for operating the deemed employment payment through your own company, including employer's National Insurance at 15% above the £5,000 secondary threshold for 2026/27 — a cost that previously sat with the fee-payer.

None of this changes whether an engagement genuinely looks like employment or self-employment. What it changes is who decides, who's liable if it's wrong, and who needs the paper trail.

What to actually do about it

Find out your client's size classification for the relevant period, in writing. Client size for OPW purposes is based on the two most recent financial years' figures, so don't assume — a client that felt "obviously large" a few years ago may now sit inside the new small-company limits. Contractors are entitled to request written confirmation of a client's size determination, and clients have a set window (45 days from the request under HMRC guidance) to respond.

Watch out for group structures. If your client is part of a wider group, the turnover, balance sheet, and headcount of all connected companies are aggregated — a subsidiary that looks small on its own can still be caught if the group as a whole is medium or large. Don't assume small-looking equals small-exempt without checking.

If responsibility shifts to you, build your evidence file before HMRC ever asks for it. Once you're back to self-assessing under Chapter 8, HMRC's Check Employment Status for Tax (CEST) tool, your contract terms, and — critically — how the engagement actually runs day to day all matter. Keep contracts, correspondence about substitution and control, and a record of how you were actually working, not just what the paperwork says.

Don't let this become an excuse to get sloppy with the basics. Whether you're inside or outside IR35, the underlying bookkeeping doesn't change: invoices raised, income received, expenses claimed, and — if you do end up processing a deemed payment — the PAYE and NI that comes with it all still need to be recorded properly and reconciled against what actually happened in your bank account.

Where this fits with Founders Ledger

This is exactly the kind of change that's easy to miss until it costs you — a threshold buried in company law that quietly reshapes a tax rule most directors only think about once a year. If your IR35 position changes for 2026/27, the practical fallout lands squarely in your bookkeeping: different treatment for a deemed payment, a different mix of salary and dividends, and evidence you'll want to be able to produce quickly if HMRC ever asks.

Founders Ledger keeps your company's bookkeeping, dividend records, and live tax estimates in one place, built around how UK limited company directors actually work — so if your circumstances change mid-year, whether that's an IR35 shift, a new client, or a change in how you pay yourself, your records and your tax picture update with you instead of turning into a reconciliation project next January.

This article is for general guidance only and isn't personal tax or legal advice. IR35 status depends on the specific facts of each engagement, and getting it wrong can be costly — if you're unsure how the off-payroll rules apply to your situation, speak to a qualified accountant or IR35 specialist. Figures and thresholds are correct at the time of writing (September 2026) and may change.