IR35 determines whether a contractor working through their own limited company is taxed as a genuine business or as an employee. Two changes took effect on 6 April 2026: the size thresholds that decide which clients must make this determination increased, and agencies and end clients became liable for PAYE underpayments in umbrella company supply chains. Both changes affect how much tax a contractor actually keeps.
Inside vs Outside IR35: What Each Status Actually Means
Being inside IR35 means HMRC treats the contract as employment for tax purposes, even though the contractor works through a personal service company. The fee-payer deducts Income Tax and employee National Insurance (8%, rising to 2% above £50,270) from the contractor’s fees before payment, in the same way an employer deducts PAYE from a salary.
Being outside IR35 means the contractor is genuinely in business on their own account. The company is paid gross, pays Corporation Tax on profits, and the contractor extracts income through a salary and dividends mix, exactly as covered in our guide to salary vs dividends for 2026/27.
The difference in take-home pay between the two statuses is substantial. Being inside IR35 typically costs 20 to 25% more in tax than outside IR35, for the same gross income from the same contract.
Who Decides Your IR35 Status
Since April 2021, medium and large private sector clients decide a contractor’s status, not the contractor. The client must take reasonable care and issue a Status Determination Statement (SDS) explaining the conclusion and the reasons behind it. Many large organisations, facing liability if they get a determination wrong, default to assessing every contractor as inside IR35 rather than reviewing individual contracts carefully.
Small clients are exempt from this responsibility. When the end client qualifies as small, the contractor’s own company determines its own status.
What Changed From 6 April 2026: Higher Small-Company Thresholds
Two of the three statutory thresholds used to define a “small” client increased on 6 April 2026:
| 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 thresholds. Some businesses that previously had to make IR35 determinations for their contractors now fall outside that requirement, meaning responsibility shifts back to the contractor’s own personal service company for contracts with those clients.
This is worth checking directly rather than assuming. A client that was medium-sized last year, and therefore responsible for your determination, may now qualify as small under the new thresholds, putting the determination back in your hands.
What Changed From 6 April 2026: Umbrella Company Liability
The second change is larger in scope. From 6 April 2026, agencies and end clients can become liable for PAYE underpayments where a worker is supplied through an umbrella company, even when that umbrella company is the one running payroll. This is described as the most significant shift in off-payroll working supply chain rules since the 2021 private sector reform.
For contractors working through umbrella companies rather than their own limited company, this increases scrutiny throughout the supply chain. Agencies and end clients now have direct financial reasons to check that an umbrella provider is genuinely compliant, rather than treating the arrangement as someone else’s problem.
Getting a Determination Wrong Is Expensive
If an “outside IR35” determination turns out to be incorrect, HMRC can reclassify all income received as employment income, going back several years. This triggers backdated Income Tax, National Insurance, interest, and penalties, and investigations covering multiple tax years are common once HMRC opens an enquiry.
HMRC’s own Check Employment Status for Tax tool (CEST) is the standard starting point for a determination, though it is not the final word. Documented, factual evidence of how a contract actually operates in practice, not just the wording of the contract, is what HMRC looks at if a determination is later challenged.
What Contractors Should Do Now
Check whether your current end clients still count as medium or large under the new thresholds, since this decides who is responsible for your determination going forward. Keep records of how each contract actually operates day to day, including supervision, control, and whether you have a genuine right of substitution, since these are the factors HMRC examines. Review any Status Determination Statement you have been given and confirm the stated reasoning matches how the work is genuinely carried out.
If you work through an umbrella company, confirm it operates PAYE correctly and can demonstrate this, given the new supply chain liability rules place agencies and end clients under closer scrutiny of umbrella arrangements.
How Direct Assist Accountants Can Help
We work with contractors across Slough and the surrounding areas on both sides of the IR35 divide, reviewing contract terms, advising on the salary and dividend structure that fits an outside IR35 determination, and helping keep the records that matter if a determination is ever challenged. Our contractor accounting service covers this as standard, alongside the day to day bookkeeping and tax work a limited company contractor needs.
If you are not sure how the April 2026 threshold changes affect your current contracts, get in touch for a free consultation and we will go through your specific situation.
This article reflects UK off-payroll working rules as confirmed for the 2026/27 tax year following the April 2026 changes. Rules and thresholds can change. For advice specific to a particular contract, consult a qualified accountant.