Contractor Tax: New Small Company Rules Explained
New company size thresholds mean IT contractors with small company clients won’t see IR35 changes until 2027/28. Learn the details, timelines, and practical advice on navigating this transition.
The Evolution of Off-Payroll Rules for Contractors
The landscape of IT contracting in the UK remains as dynamic as ever, shaped by regulatory reforms aiming to balance enterprise and compliance. With the recent changes to company size thresholds, the off-payroll working (IR35) obligations shift yet again, leaving many contractors and their clients navigating a protracted period of uncertainty.
Key Update: Company Size Thresholds Lifted
As of April 2025, amendments to the Companies Act have raised two of the three benchmarks determining business size:
- Turnover: now above £15 million qualifies as medium-sized
- Balance sheet total: a new threshold above £7.5 million
- Employees: the count remains at 50 or above
Notably, roughly 14,000 enterprises are set to be reclassified from medium to ‘small’. For contractors, this means a significant portion of end clients will eventually be relieved from the requirement to operate the notorious off-payroll working rules. However, this reprieve is not immediate.
"For many contractors, change is often delayed by the machinery of regulation. Sometimes, reform lags behind the needs of the present."
A 19-Month Wait: The Devil in the Details
While the promise of simplification is real, HMRC’s Employment Status Manual (ESM10006A) clarifies that companies who become ‘small’ under the new rules won’t see a change in their off-payroll responsibilities until the 2027/28 tax year. For context:
- The new accounting periods start on 6 April 2025
- The earliest possible filing date for the new period is January 2027
- Thus, changes to off-payroll working obligations apply only from 2027/28
| Criteria | Old Threshold | New Threshold (from April 2025) |
|---|---|---|
| Turnover | £10.2 million | £15 million |
| Balance Sheet Total | £5.1 million | £7.5 million |
| Employee Count | 50 | 50 |
For contractors working with these companies, responsibility for IR35 status remains with the client until the next cycle, extending the current arrangement by at least 19 additional months.
What Does This Mean for Contractors?
"Contractors long accustomed to the shifting sands of IR35 may feel frustration with yet another staggered roll-out. Patience and preparedness, as ever, are virtues in our sector."
In practice, until April 2027, the affected companies must continue determining contractors’ employment status and operating under existing off-payroll protocols. Contractors will only reclaim this responsibility once the new rules are in active effect.
Expert Opinion: Guidance for IT Contractors
We asked an industry expert for practical advice to those awaiting the transition:
- Sit tight, but prepare: Contractors should maintain existing compliance standards but use this time to review and understand their IR35 status in anticipation of responsibility reverting to them.
- Monitor client classification: Stay informed about the size status of your end clients and be ready for changes in process.
- Consult trusted advisors: Specialist IR35 consultancies and accountants can guide you as the landscape shifts.
"The machinery of government is never swift. For now, our advice to contractors is clear: stay compliant, remain vigilant, and begin planning for your eventual return to the driver’s seat on IR35 matters."
IR35 Insurance and Protection Options
This gradual shift in responsibility highlights the importance of staying protected:
- Professional Indemnity and IR35 insurance remain sensible safeguards
- Relevant life insurance and income protection policies can provide stability amid uncertainty
| Policy Type | Who Should Consider | Key Benefit |
|---|---|---|
| IR35 Insurance | Limited Company | Mitigates risk of HMRC investigation |
| PI Insurance | All Contractors | Covers claims for professional errors |
| Relevant Life Cover | Directors | Tax-efficient, company-paid life cover |
| Income Protection | All Contractors | Replaces income if unable to work |
In turbulent regulatory times, a layered approach to protection is a prudent measure.
The essentials:
- Stay up-to-date with annual accounts and financial year start dates
- Track when your client actually qualifies as ‘small’
- Prepare for renewed IR35 responsibility, but remain compliant in the meantime
"Experience tells us that regulatory change, though inevitable, can often feel glacial. For IT contractors and their clients, patience and forward planning are, paradoxically, the watchwords of agility."
Call to Action
Stay informed on the latest developments by subscribing to official updates, consulting with your accountant regularly, and preparing a compliance checklist for the coming transition.
For further security, compare IR35 insurance packages and review your client agreements ahead of 2027.
Further Reading for Contractors
- Delay IR35 private sector off-payroll until 2021, experts say
- Umbrella Company Consultation – the government’s response and the need for clarification
- IR35 specialist expects employer NI hike to impact blanket ban clients the most
- How does a Non-Disclosure Agreement (NDA) work?
- Digital platform reporting rules: an IT contractor’s guide
Stay wise and well-prepared—continuity favours those who combine tradition with cautious innovation.
