How IR35 and Off-Payroll Working Rules Work in 2026

On 6 April 2026 the IR35 and Off-Payroll Working Rules change in a specific and consequential way. The small-company size thresholds that exempt a client from the post-2021 off-payroll framework increase, turnover from £10.2 million to £15 million and the balance sheet total from £5.1 million to £7.5 million, while the employee headcount threshold remains at 50. In practical terms, a cohort of mid-sized UK businesses will cease to be responsible for determining the employment status of the contractors they engage, and responsibility will shift back to the contractor's personal service company. HMRC estimates that the reform has moved around 130,000 contractors into deemed employment tax status since 2021 and that the IR35 framework generates roughly £1.5 billion per year in tax yield.

This article sets out what the IR35 and Off-Payroll Working Rules actually require in 2026, how the 2021 and 2024 reforms changed liability and administration, what the 6 April 2026 threshold change means in practice for end clients and contractors, and which other tax and PAYE changes take effect at the same time. This is not tax advice. Specific status determinations require a professional assessment of the particular working arrangement.

What IR35 actually is in law

IR35 is the common name for the off-payroll working rules, the original version of which was announced in HMRC press release 35 of 1999 and came into force on 6 April 2000. The statutory home of the rules is now in Chapter 8 and Chapter 10 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003, known as ITEPA. The legislative purpose is to ensure that a worker who provides services to a client through a personal service company, a PSC, but whose working arrangement would be an employment relationship if the company were removed, pays broadly the same Income Tax and National Insurance Contributions as an employee would.

There are two regimes operating in parallel under the umbrella of the off-payroll rules. Chapter 10 of ITEPA applies where the end client is in the public sector, or is a medium or large private-sector organisation; the client is responsible for determining the worker's employment status, issuing a Status Determination Statement (SDS) to the worker and the fee-payer, and the fee-payer must operate PAYE where the engagement is inside IR35. Chapter 8 of ITEPA applies where the end client is in the small-company category, and in that case the contractor's PSC determines its own status under the original 2000 rules. The distinction matters because the two regimes allocate tax liability differently.

The 6 April 2021 private sector reform, originally legislated for April 2020 and delayed by one year due to the COVID pandemic, moved the determination responsibility from the PSC to the end client for medium and large private-sector engagements. The 6 April 2017 public sector reform had already done the equivalent for public bodies. Between 2021 and 2026 the framework has been refined in two material respects: the Finance Act 2024 introduced a set-off mechanism from 6 April 2024 that allows HMRC to offset Income Tax and National Insurance already paid by the worker and their PSC against the fee-payer's PAYE liability, correcting a double-taxation problem that had been present since the original private-sector reform.

How IR35 and Off-Payroll Working Rules work in 2026

The IR35 and Off-Payroll Working Rules make contractors working through a personal service company pay Income Tax and National Insurance like an employee where the working arrangement resembles employment. Medium and large clients issue a Status Determination Statement. Small-company clients are exempt; the contractor's PSC determines its own status.

That definition is deliberately narrow because IR35 status is a fact-specific question that turns on the working arrangement rather than on the contract wording. A contract can state that it is 'outside IR35' but if the day-to-day working reality resembles employment, the engagement is inside IR35 regardless of what the paperwork says. HMRC and the tribunals look through the contract to the substance of the arrangement.

The three tests that decide status

Employment status under IR35 is assessed holistically, but three tests have historically carried the most weight in the tribunal and appellate case law.

The first is personal service and the right of substitution. The contractor must not be required to perform the services personally; the right to send a substitute to do the work without the client's approval of that specific individual is the single most powerful indicator of outside-IR35 status. A right of substitution that is hedged with client veto rights, or that the contractor has never in fact exercised, carries less weight. HMRC guidance and tribunal decisions consistently treat an unfettered substitution right as dispositive in most cases.

The second is control. The question is how, when, and where the work is done, and who decides. A contractor who is told what to do on a project-by-project basis but retains autonomy over the means of delivery is likely to be outside IR35. A contractor who is directed day-to-day on working methods, hours, and location in the same way a permanent employee would be is likely to be inside. The test does not look at supervision of outputs, which is commercially normal, but at control of the working arrangement.

The third is mutuality of obligation. An employment relationship requires a continuing mutual obligation between the two parties to provide and to accept work. A contract for services, by contrast, exists for a specified task or period. HMRC's Check Employment Status for Tax tool, known as CEST, is widely used as an initial status determination aid but it has been criticised for assuming that the existence of any contract establishes mutuality, without testing the case law position. This is the principal reason a CEST determination is a starting point rather than a definitive answer.

Beyond these three tests, tribunals also consider financial risk, whether the contractor is 'part and parcel' of the client's organisation, whether the contractor operates a genuine business on their own account, and whether equipment is provided by the contractor or the client. The case law is voluminous and is the principal reason many medium and large clients retain specialist employment tax advisers for borderline engagements.

What the 6 April 2026 threshold change actually does

From 6 April 2026 the statutory size thresholds that determine whether a private-sector end client is classified as 'small' for IR35 purposes increase. The new thresholds, aligned with the Companies Act size definitions, are: turnover up to £15 million (previously £10.2 million); balance sheet total up to £7.5 million (previously £5.1 million); and employees up to 50 (unchanged). A client that meets two of the three tests is treated as small and falls outside Chapter 10. The effect is that a cohort of private-sector end clients that were previously within scope of the 2021 reforms will fall back under the Chapter 8 regime where the contractor's PSC determines its own status.

The timing effect matters because IR35 status assessments rely on the client's accounts from the preceding financial year. A company whose previous financial year figures now place it under the revised thresholds will be treated as small for IR35 purposes for engagements beginning in the 2026/27 tax year and after. Transitional provisions apply, and the practical effect of the threshold change will therefore be felt progressively through 2026 and 2027 rather than on a single day.

For contractors, the change is commercially material in two directions. Contractors engaged with a client that now falls below the thresholds move from an environment where the client decides their IR35 status to one where the PSC decides. That increases autonomy but also increases compliance responsibility and liability if the determination is wrong. Contractors engaged with a client that remains above the thresholds see no change. For end clients in the affected mid-market band, the administrative relief is real but carries a caution: downstream contractors may now expect the client to cooperate in providing the information the PSC needs to make its own status determination accurately.

The parallel PAYE and benefits changes from April 2026

Two further changes take effect from 6 April 2026 that are not IR35 changes but that are operating on the same population and at the same time.

The first is a new PAYE liability rule for labour-supply chains involving umbrella companies. From 6 April 2026, if an umbrella company fails to account for PAYE and National Insurance correctly, the recruitment agency or the end client in the supply chain becomes jointly and severally liable for the shortfall. The rule applies to all payments made on or after that date. The policy purpose is to close a supply-chain gap in which non-compliant umbrella operators have historically been difficult for HMRC to pursue successfully. The practical effect is to increase the level of due diligence that agencies and end clients must exercise when engaging contingent labour through umbrella structures.

The second is mandatory payrolling of benefits in kind. From 6 April 2026, with limited exceptions including employment-related loans and accommodation, all employer-provided benefits must be reported and taxed through the PAYE payroll in real time, replacing the P11D annual reporting process. For contractors inside IR35 who receive benefits in kind through the deemed employment payment, this is an administrative rather than substantive change but it alters the timing and method of tax collection. For end clients, it is a payroll system change that runs alongside, rather than as part of, the IR35 threshold reform.

How the regime is actually performing

HMRC's own evaluation material indicates that the 2021 reforms have increased compliance and tax yield. The Treasury's most recent public figures suggest that IR35 yield is running at around £1.5 billion per year and that approximately 130,000 contractors have moved into deemed employment tax status since 2021. Those numbers measure the fiscal effect of the rules but do not address their structural effects.

The principal structural criticism is that a proportion of medium and large end clients have applied 'blanket' inside-IR35 determinations to entire contractor populations rather than assessing engagements individually. HMRC guidance is explicit that blanket determinations are not acceptable and that each engagement must be assessed on its own facts, but enforcement of that principle against risk-averse corporate clients has been inconsistent. The industry body IPSE and the professional contractor groups have argued that blanket determinations suppress flexible labour supply without regard to the genuine working arrangement.

Enforcement against non-compliant end clients has continued. High-profile cases include a substantial settlement by a Welsh public body, and a historic IR35 settlement paid by Post Office Ltd in 2025 for engagements during a period before the public sector reform. HMRC penalties for incorrect determinations range up to 30% of unpaid tax for careless errors and up to 100% for deliberate non-compliance, and investigations can cover several tax years.

The framework also remains politically unsettled. Reform UK has said it would repeal IR35 entirely if it formed a future government. The Conservative Party has indicated it would 'look again' at IR35 reform if returned to office. The current government has signalled that the wider review of employment status, originally due in 2025, has been delayed into 2026, and that further refinement of the regime based on how the April 2026 threshold change performs is being kept under review.

Fun fact: The 'IR35' name is entirely an accident of HMRC press-office numbering. When the Inland Revenue, which merged with HM Customs to form HMRC in 2005, announced the original off-payroll rules in the March 1999 Budget, the accompanying press release happened to be the 35th of the year. The rules themselves have no statutory section number of 35, and the modern legislative home of the regime, Chapter 10 of Part 2 of ITEPA 2003, is numbered differently altogether. The name IR35 survived because the underlying policy question (when is a contractor really an employee) is easier to remember by its press-release reference than by its statutory citation.

Conclusion

The IR35 and Off-Payroll Working Rules are structurally stable in 2026 but are undergoing the most significant refinement of the post-2021 framework. The small-company threshold increases from 6 April 2026 will move a cohort of mid-sized private-sector clients out of scope, returning status determination to their contractors' PSCs. The parallel umbrella-company PAYE liability rule and the mandatory payrolling of benefits change the compliance environment around IR35 rather than IR35 itself. The fundamental employment-status tests, substitution, control, and mutuality of obligation, remain the centre of gravity. For contractors and end clients alike, the practical year-ahead priority is documentation: a current Status Determination Statement where one is required, a defensible professional assessment where CEST does not produce a determination, and a clear contractual record of the actual working arrangement. The IR35 and Off-Payroll Working Rules are not reforming radically this year; they are refining at the margins, and most of the margins are worth understanding. This article is general commentary and not tax advice. Specific status determinations and their consequences should be assessed by a qualified employment tax adviser.