‘Bigger’ companies to enjoy ‘small’ company liability under new IR35 rules; freelancers risk underpricing
More companies are set to be freed of liability to check if contractors fall in or outside of IR35 under regulations. Freelancers must be prepared to price accordingly. Vincent Huguet, CEO and co-founder of Malt, the leading platform for freelance talent in Europe, welcomes the new changes but warns companies – and freelancers – not to become complacent.
Changes to IR35 coming into play from April 2026, including company size threshold changes and the introduction of the PAYE set off mechanism, are set to change the game for thousands of scaling businesses.
IR35, a UK tax legislation designed to ensure that contractors who work like employees through intermediaries, for example a limited company, pay similar Income Tax and National Insurance to ‘standard’ employees. In other words, if a freelancer is doing the same kind of work as an employee, the government wants them taxed as an employee.
According to HMRC, IR35 reform has already shifted more than 130,000 workers into deemed employment tax status since 2021, reflecting the scale of the framework and the impact it continues to have on the UK contracting workforce.
The liability to check if a freelancer is inside or outside of IR35, and therefore being taxed correctly, depends largely on the size of the company employing the contractor. ‘Small’ companies are exempt, so the onus falls on the freelancer, whilst medium and larger companies bear the responsibility. Changes set to come into play in April 2026 mean that the threshold of what is classed as a ‘small company’ is being raised considerably, and consequently many companies will be freed from the burden of this responsibility
“Moving the threshold for ‘small’ company size,” says Huguet, “helps to shift responsibility away from hiring managers, meaning they can focus on when and what they want, not necessarily how much.”
The PAYE set off mechanism
Historically, if a client failed to correctly apply IR35 legislation, HMRC could demand the full PAYE and National Insurance bill from the deemed employer without considering tax already paid by the ‘Personal Service Company’ (PSC). The new set of rules allow HMRC to offset tax and National Insurance (NI) already paid at the contractor’s end when calculating liability.
“This is an important step towards avoiding double taxation,” explains Huguet. “It removes the risk that a freelancer ultimately ends up paying more tax than necessary and quite rightly takes responsibility for calculating tax already paid by looking at historic records”.
“Small” companies get bigger within exemption definition
Huguet continues: “A Status Determination Statement (SDS) is a legal document required under HMRC’s off-payroll working rules (IR35), prepared by an end-client to declare if a contractor is “inside” or “outside” IR35, outlining the reasons for this decision. In the off payroll working regime, responsibility for issuing a SDS normally sits with the client.
“However, this is only true when the client qualifies as medium or large under UK company law. If the client is a small company, the responsibility shifts back to the contractor’s PSC. Understanding this distinction is central to IR35 compliance because it affects who must demonstrate reasonable care and who carries exposure if an incorrect classification is made”.
“This is set to shift significantly,” explains Huguet. “The new classification of a small company is set to be totally redefined with more onus set to sit with the freelancer, not the company, given the increased benchmark of turnover.”
Prior to April, the exemption for small companies has been classified as an annual turnover of no more than £10.2m, a balance sheet total of no more than £5.1m, and 50 or fewer employees. A company had to meet at least two of these three criteria to qualify as small. From 6 April 2025, the thresholds increase to a £15m turnover, £7.5m balance sheet, and 50 employees.
“For contractors, it’s more important than ever to price correctly,” says Huguet. “For example, last year employer National Insurance Contributions (NIC) increased from 13.8% to 15%, and the threshold for payment was reduced from £9,100 to £5,000 annually. This meant it became instantly more expensive to hire, or to pay contractors sitting within IR35.
With increasing onus on the contractor to ensure they are set up correctly, they must be cognisant that Employer NIC is deducted from the assignment rate before calculating a contractor’s pay which influences both contractor inside IR35 and contractor outside IR35 negotiations”.