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IR35: What It Means for Contractors and Businesses in 2025/26

The UK’s IR35 legislation has long been a source of confusion and frustration for contractors, freelancers, and the companies that hire them. With major reforms coming into effect in April 2026, now is the time to revisit what IR35 means — and how the changes could benefit or affect you.

At Merranti Accounting, we specialise in helping contractors and companies navigate IR35 rules with clarity and confidence. This guide breaks down the current legislation, what’s changing, and what you need to do.

🤔 What Is IR35?

IR35 is a set of tax rules designed to combat “disguised employment.”

It applies when an individual supplies their services to a client via a limited company (typically a Personal Service Company or PSC) but, were it not for the company, they would be considered an employee of the client.

If IR35 applies, HMRC requires the contractor’s income to be taxed like an employee’s:

  • Income Tax and National Insurance are deducted at source,

  • No access to dividend tax rates or corporation tax planning,

  • Expenses are more limited.

🔄 Who Decides IR35 Status?

This depends on who the client is:

1. Large or Medium-Sized Clients (Since April 2021)

  • The client (not the contractor) must determine IR35 status.

  • If “inside IR35,” they must deduct tax and NIC before payment.

2. Small Clients

  • The contractor’s company is still responsible for determining IR35 status.

✅ What counts as “small”?
As of April 2026, the definition of a small company is being widened.

New thresholds (from April 2026):

To qualify as small, a business must meet two out of three of the following:

  • Turnover: Not more than £15 million (previously £10.2m)

  • Balance sheet total: Not more than £7.5 million (previously £5.1m)

  • Number of employees: Not more than 50

This change means more clients will fall outside of IR35 rules, shifting the responsibility for assessing IR35 status back to contractors.

🧠 Why Does IR35 Matter?

Being “inside IR35” means:

  • You’re treated like an employee for tax purposes.

  • You pay more tax and NICs, potentially reducing take-home pay by 25% or more.

  • You can’t use dividends or claim many business expenses.

Being “outside IR35” means:

  • You can pay yourself via dividends and salary.

  • You retain flexibility and access to corporation tax planning.

  • You must demonstrate you are genuinely self-employed.

🔍 How Does HMRC Determine IR35 Status?

Whether you’re caught by IR35 depends on the working relationship, not the contract wording alone.

Key factors:

  1. Control – Does the client control how, when, and where you work?

  2. Substitution – Can you send a substitute to do your work?

  3. Mutuality of Obligation – Is the client obliged to give you work, and are you obliged to accept it?

  4. Integration – Are you treated like an employee (e.g. using internal systems, attending staff meetings)?

  5. Financial risk – Do you take on genuine business risk (e.g. fixed-price contracts)?

If the engagement looks like employment in disguise, you are likely inside IR35.

🔁 What’s Changing in April 2026?

As confirmed in the 2024 Autumn Budget, from 6 April 2026, the “small business exemption” is being expanded.

This means:

  • More companies will fall into the “small” category, and therefore:

    • Will not be responsible for determining IR35 status.

    • The responsibility reverts to the contractor’s PSC.

👉 For many contractors, this could mean regaining control of their IR35 status — but with it comes greater risk and responsibility.

👩‍💼 What Should Contractors Do Now?

✅ Review Your Contracts

  • Make sure your contracts include the right of substitution, minimal control clauses, and no mutual obligation.

  • Avoid day-rate contracts with no deliverables, as these can look like disguised employment.

✅ Check Working Practices

  • Your actual working conditions must match your contract.

  • Don’t accept client tools, emails, or HR policies unless required and stated in the agreement.

✅ Use IR35 Status Tools

  • Use HMRC’s CEST tool (Check Employment Status for Tax) — but treat the results with caution.

  • Get a contract review from an independent expert or your accountant.

🧾 What Should Businesses Do?

If you engage contractors through PSCs:

  • Review your off-payroll processes in light of the new April 2026 thresholds.

  • Assess whether you’ll still need to determine IR35 status.

  • Prepare for the possibility that more contractors will be self-assessing again — increasing your exposure if HMRC later challenges the arrangement.

🔍 Case Study: Sarah, a Freelance IT Consultant

  • Works for a fintech firm via her PSC.

  • Her client previously had turnover of £11m, balance sheet of £6m, and 45 staff – so they were not “small” under the old rules.

  • After April 2026, the client now qualifies as small, and Sarah becomes responsible for determining her IR35 status again.

👉 Sarah must now carefully assess her working practices, rewrite her contract, and ensure she’s compliant — otherwise HMRC may challenge her and issue a retrospective tax bill.

📣 Final Thoughts

The IR35 landscape is evolving — and fast. While the April 2026 changes could be a welcome opportunity for many contractors, they also bring risks if status isn’t determined correctly.

Whether you’re:

  • A contractor looking to maximise tax efficiency, or

  • A business wanting to stay compliant while engaging flexible workers…

👉 Now is the time to review your arrangements and plan for the rule changes ahead.

📨 Stay ahead of legislation like IR35 with Merranti’s expert accounting and advisory team.

We offer:

  • IR35 contract reviews

  • Status assessments

  • Payroll and PSC structuring

  • Support for end clients engaging off-payroll workers

👉 Find more insights in Merranti’s newsletter here
Let us help you keep more of what you earn — and avoid unnecessary HMRC risks.

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