IR35 and Off-Payroll Working Explained: 2026/27 Rules for Contractors and Clients
If you contract through your own limited company, or you engage contractors through one, IR35 determines how that income is taxed, and getting it wrong is expensive for whoever is responsible. Here is what applies from April 2026. If you're still weighing up whether to contract as a sole trader or through a limited company in the first place, see our sole trader vs limited company guide.
What is IR35?
IR35, formally the off-payroll working rules, is anti-avoidance legislation designed to stop "disguised employment", situations where someone works through a personal service company (PSC) or similar intermediary, but would be treated as an employee if they worked directly for the client.
If a contract is genuinely inside IR35, the income should be taxed broadly like employment income, Income Tax and National Insurance deducted through PAYE, even though the contractor is legally supplying services through their own company.
If a contract is genuinely outside IR35, the contractor's company is paid gross, pays Corporation Tax on its profits, and the contractor extracts income through their own salary and dividend structure.
Who decides your status
This depends on the size of the end client you are contracting for.
Public sector clients (since 6 April 2017) and medium or large private sector clients (since 6 April 2021) must determine the contractor's status themselves, and issue a Status Determination Statement (SDS), a written document stating whether the engagement is inside or outside IR35, with reasons, sent to both the contractor and the fee payer.
Small private sector clients are exempt from this responsibility. If your end client is genuinely small, your own PSC determines its own status under the original 2000 rules (known as Chapter 8).
What counts as a "small" client from April 2026
The size thresholds that determine whether a client counts as small changed from 6 April 2026:
| Test | Old threshold | New threshold (from April 2026) |
|---|---|---|
| Turnover | £10.2 million | £15 million |
| Balance sheet total | £5.1 million | £7.5 million |
| Employees | 50 | 50 (unchanged) |
A client is generally treated as small if it does not exceed at least two of these three thresholds. The higher turnover and balance sheet limits mean some clients who were previously classed as medium or large, and therefore responsible for the status decision, will move into the small category from the 2026/27 tax year, shifting IR35 responsibility back onto the contractor's own PSC for those engagements.
Important: the underlying rules for actually determining status, the tests themselves, did not change in April 2026. Only the size thresholds deciding which rulebook applies to a given client moved.
What determines inside versus outside status
Status is based on case law tests, not job titles or how a contract is labelled on paper:
- Control: how much say does the client have over how, when, and where the work is done?
- Substitution: can you genuinely send someone else to do the work in your place, and would the client accept that?
- Mutuality of obligation: is the client obliged to offer work, and are you obliged to accept it, on an ongoing basis?
A contract that reads as clearly outside IR35 on paper but does not reflect the genuine working reality, for example, a substitution clause that exists but the client would never actually accept, is not compliant, and HMRC looks at the actual working practices, not just the written contract.
Some end clients apply blanket determinations, placing all PSC contractors inside IR35 regardless of individual circumstances, to avoid the administrative burden of assessing each contract properly. This is not compliant with the legislation, and contractors can challenge it.
Umbrella company liability: the other April 2026 change
Separate from the threshold changes, new joint and several liability (JSL) rules for umbrella companies took effect from 6 April 2026, inserted into ITEPA 2003 as a new chapter by the Finance Act 2026.
This means agencies, or the end client if there is no agency in the chain, can now become liable for PAYE and National Insurance underpayments if the umbrella company employing the contractor fails to account for them correctly, even where the umbrella company was the one running payroll. This significantly raises the due diligence expected of anyone engaging contractors through umbrella arrangements, checking that the umbrella company itself is compliant is no longer someone else's problem if it goes wrong.
Challenging a Status Determination Statement
If you disagree with an SDS, you can formally dispute it with the client at any point up until the final payment under the contract. The client has 45 days to respond to a challenge. You can also formally request written confirmation of the client's size classification if you are unsure whether they should be treated as small.
If a client fails to issue a valid SDS at all when required to, the tax and National Insurance liability defaults to the client, not the contractor.
What if a determination turns out to be wrong
Before April 2024, if a fee payer got a determination wrong, HMRC could pursue the full PAYE and National Insurance liability from the fee payer with no credit for tax the contractor had already paid through their own PSC, effectively taxing the same income twice. The Finance Act 2024 fixed this: HMRC can now offset Income Tax and National Insurance already paid by the worker and their PSC against the fee payer's liability, removing the double taxation risk that previously existed.
Common questions
Can my IR35 status change partway through a contract?
Yes. If working arrangements change, more supervision, more control, exclusivity introduced, status can shift from outside to inside during the life of a contract, even if the original SDS said otherwise.
I have been inside IR35 for years. Can I move outside now that thresholds have changed?
Potentially, if your end client has genuinely reclassified as small and responsibility has shifted to your own PSC. But you cannot simply relabel the arrangement, your contract and actual working practices need to genuinely reflect self-employment, not just a change in paperwork.
What penalties apply for getting IR35 wrong?
Incorrect determinations can trigger backdated PAYE and National Insurance liabilities, plus penalties of up to 100% of the unpaid tax in serious cases. HMRC can also review historical arrangements retrospectively if it believes tax has been underpaid, sometimes covering several years at once.
Does IR35 apply to all my contracts, or just some?
Status is assessed on a contract by contract basis. You can genuinely be inside IR35 for one engagement and outside for another, running concurrently, depending on the specific terms and working practices of each.
How does IR35 affect the salary versus dividends decision?
If an engagement is inside IR35, that income is taxed broadly as employment income regardless of your usual salary and dividend structure. The tax planning around salary and dividends applies mainly to income from engagements that are genuinely outside IR35. See our salary versus dividends guide for the detail.
How Books & Returns helps
IR35 status genuinely changes what a contract is worth to you, and the rules just shifted meaningfully with the April 2026 threshold changes and umbrella company liability reforms. We help contractors review contracts and working practices against the current tests, support clients in issuing accurate Status Determination Statements, and keep everyone informed as thresholds and rules continue to evolve.
This guide is for general information only and does not constitute tax or legal advice. IR35 status depends on the specific facts of each engagement, always confirm your position with a qualified accountant before making decisions based on this content.