IR35 decides whether HMRC taxes a contractor working through their own limited company as a genuine business or as an employee. Two IR35 changes took effect on 6 April 2026. First, the size thresholds that decide which clients must make IR35 determinations went up. Second, agencies and end clients became liable for unpaid PAYE in umbrella company supply chains. Both changes affect how much tax a contractor actually keeps.
Inside vs Outside IR35: What Each Status Means
Inside IR35 means HMRC treats the contract as employment for tax purposes, even though you work through a personal service company. The fee-payer deducts Income Tax and employee National Insurance from your fees before paying you. Employee National Insurance is 8% on earnings between £12,570 and £50,270, and 2% above that. This works in the same way as PAYE on a normal salary.
Outside IR35 means you are genuinely in business on your own account. Your company receives fees gross and pays Corporation Tax on its profits. You then take income through a mix of salary and dividends, as our guide to salary vs dividends for 2026/27 explains.
The difference in take-home pay can be large. On the same contract and the same gross fees, an inside IR35 status often costs a contractor thousands of pounds a year in extra tax.
Who Decides Your IR35 Status?
Since April 2021, medium and large private sector clients decide a contractor’s status. The client must take reasonable care and issue a Status Determination Statement (SDS). This statement explains the decision and the reasons behind it.
Many large organisations fear the cost of getting a decision wrong. As a result, some place every contractor inside IR35 instead of reviewing each contract properly.
Small clients do not have this duty. When the end client counts as small, your own company decides its IR35 status.
IR35 Change 1: Higher Small Company Thresholds
From 6 April 2026, two of the three thresholds that define a “small” client went up:
| Threshold | Previous | From April 2026 |
|---|---|---|
| Turnover | £10.2 million | £15 million |
| Balance sheet total | £5.1 million | £7.5 million |
| Employee headcount | 50 | 50 (unchanged) |
A client counts as small if it meets at least two of the three tests. Some businesses that used to make IR35 decisions for their contractors no longer have to. For those contracts, the responsibility moves back to your own company.
Check this directly rather than assuming. A client that was medium-sized last year may now count as small. If so, the IR35 decision is back in your hands.
IR35 Change 2: Umbrella Company Liability
The second change is wider in scope. From 6 April 2026, agencies and end clients can become liable for unpaid PAYE when an umbrella company supplies a worker. This applies even when the umbrella company runs the payroll. Many see it as the biggest change to off-payroll supply chains since the 2021 private sector reform.
If you work through an umbrella company rather than your own limited company, expect closer checks. Agencies and end clients now have a direct financial reason to make sure an umbrella provider is fully compliant.
Why a Wrong Decision Is Expensive
If HMRC finds that an “outside IR35” decision was wrong, it can treat your income as employment income for several past years. This means backdated Income Tax, National Insurance, interest and penalties. Once HMRC opens an enquiry, it often looks at more than one tax year.
HMRC’s Check Employment Status for Tax (CEST) tool is the usual starting point, but it is not the final word. If HMRC challenges a decision, it looks at how the contract works in practice, not just what the contract says.
What Contractors Should Do Now
- Check your clients’ size: confirm whether each end client still counts as medium or large under the new thresholds. This decides who makes your IR35 decision.
- Keep working records: note how each contract runs day to day, including supervision, control and any genuine right of substitution. HMRC examines these factors.
- Review your SDS: make sure the reasons in any Status Determination Statement match how you actually do the work.
- Check your umbrella company: if you use one, confirm it runs PAYE correctly and can prove it.
How Direct Assist Accountants Can Help
We work with contractors across Slough and the surrounding areas, both inside and outside IR35. Our team reviews contract terms and advises on the right salary and dividend structure for an outside IR35 contract. If HMRC ever challenges a decision, the records we help you keep make all the difference.
Our contractor accounting service covers all of this as standard, alongside the bookkeeping and tax work a limited company contractor needs.
Not sure how the April 2026 IR35 changes affect your contracts? Get in touch for a free consultation and we will go through your situation.
This article reflects UK off-payroll working rules for the 2026/27 tax year. Rules and thresholds can change. For advice on a specific contract, consult a qualified accountant.