IR35 and Small Company Thresholds Are Changing – Here's What It Means for You.

What is IR35?

IR35, formally known as the Intermediaries Legislation, was introduced in April 2000 under the Finance Act 2000, then consolidated into Chapter 8 of ITEPA 2003, and then reforms were rolled out to the Public Sector in April 2017, and the Private Sector in April 2021.

The rules were designed to address perceived tax avoidance by individuals operating as contractors through intermediaries such as Personal Service Companies (PSCs). The legislation seeks to ensure that individuals who work under similar conditions to employees are taxed in a similar manner, regardless of whether they operate through a Limited Company.

In simple terms, IR35 ensures that if someone is effectively working as an employee, they should be taxed like an employee—regardless of how they’re paid.

How IR35 Works.

Under the current off-payroll rules, private sector businesses classified as   medium or large and ALL Public Sector organisations, are responsible for determining the IR35 status of contractors operating through intermediaries.

They must undertake an individual IR35 Assessment on the role and the worker, and provide a Status Determination Statement (SDS) outlining the outcome and rationale of their assessment as to whether the contract would sit 'Inside IR35' or 'Outside IR35'.

Small companies, however, are exempt. In these cases, responsibility for determining employment status and ensuring correct tax treatment remains with the contractor’s intermediary.

A business is currently defined as “small” if it meets at least two of the following criteria:

• Annual turnover not more than £10.2 million
• Balance sheet total not more than £5.1 million
• No more than 50 employees

What’s Changing After April 2025?

From 6 April 2025, the Companies (Accounts and Reports) Regulations 2024   will revise the thresholds as follows:

• Annual turnover: increased to £15 million
• Balance sheet total: increased to £7.5 million
• Employee count: remains unchanged at no more than 50 employees

These changes are expected to reclassify approximately 14,000 companies as "small."

This means some businesses currently responsible for IR35 status decisions will no longer be. The responsibility will shift back to the contractor’s PSC.

Note:  A business must meet these small-company criteria for two consecutive financial years before the change takes effect. So in practice, most companies won't be reclassified until at least April 2027.

What Does ‘Inside’ vs ‘Outside’ IR35 Mean?

Inside IR35:

• The contractor is effectively an employee for tax purposes.
• Income Tax and National Insurance are deducted at source by the fee payer.
• Payment is made via payroll (e.g., through an umbrella company or directly by the client or agency).

Outside IR35:

• The contractor is deemed as genuinely self-employed.
• They invoice for their work, are paid to their Ltd Company and manage their own tax affairs.
• No PAYE deductions apply.
  

Recommended Actions for Companies

• Review financials and headcount to assess whether your business may qualify as small under the new thresholds.
• Understand the two-year qualification requirement for small company status under IR35.
• Continue to comply fully with current IR35 obligations until your company is formally reclassified.
• Inform contractors in advance of any expected changes in responsibility to support a smooth transition.
• Remember, you must keep PAYE records for 3 years and company tax–related documents (including SDS evidence) for 6 years.

Tip:  Take reasonable care with every IR35 decision. As a minimum, use HMRC’s CEST tool as a guide, but don’t rely on it alone. Failure to “take reasonable care” in status determinations can lead to penalties or unexpected tax liabilities.

We at Crucial People go one step further and utilise a specialist IR35 review tool to conduct and produce SDSs for all contractor engagements.

Recommended Actions for Contractors (Ltd Co / PSC)

If you operate through a PSC and work with small businesses your company   is responsible for determining your IR35 status and is responsible for the decision and any financial liabilities.

That means:

• Be aware of upcoming changes and the shift in compliance responsibility where clients become small.
• Review your working arrangements and take professional advice if necessary.
• You may formally request confirmation of a client’s size classification.
• If the client confirms they are small, you will be responsible for assessing your own IR35 status for the relevant tax year. If no response is received, legal recourse may be available.
• Be aware, that if you are working in a contract deemed inside IR35 for a company in the £10.2m-£15m range, once you are again responsible for your own determinations, you cannot in the same role, under the same working practices, just simply switch from an 'Inside' determination to a self-determined 'Outside' classification.

Tip: If you're unsure, speak to an IR35 expert or accountant familiar with contracting.

Final Thoughts: Preparation Is Protection

IR35 isn't going anywhere—and neither is contractor talent. The key is knowing who’s responsible, when, and how to assess IR35 properly.

• For hiring businesses, it’s about being thorough, fair, and proactive.
  
• For contractors, it’s about staying informed and taking responsibility where required.

At Crucial People, we support both sides of the table. Whether you’re a business hiring technical specialists, or a contractor navigating IR35, we’ll help you understand where you stand—and what to do next.

Need IR35 Help?

•  Not sure if your business will be reclassified after April 2025?
•  Want support engaging contractors or handling IR35 assessments?
•  Are you a contractor confused about your status?

We’ve got you. Get in touch and let’s make sure IR35 compliance doesn’t trip you up.

info@crucial-people.com or call on 0203 154 9422.