Changes to the off-payroll working rules coming into force this month will relieve scaling businesses of costly compliance obligations. Yet contractors who fail to adjust their rates risk being caught out, writes Business Matters.
From this month, a raft of amendments to the UK’s IR35 tax legislation will redraw the lines of responsibility between businesses and the freelancers they engage. For thousands of companies that have until now shouldered the burden of determining whether their contractors fall inside or outside the off-payroll working rules, the changes promise welcome relief. For freelancers, however, the picture is rather more complicated.
IR35, in essence, is the government’s mechanism for ensuring that individuals who work through intermediaries such as personal service companies, but whose engagements resemble those of employees, pay a broadly equivalent amount of income tax and National Insurance. According to HMRC, the framework has already shifted more than 130,000 workers into deemed employment tax status since 2021 – a figure that underscores both its reach and its continuing impact on the UK’s contracting workforce.
Under the current regime, responsibility for determining a contractor’s IR35 status rests largely with the hiring organisation – provided that organisation qualifies as medium or large under company law. Smaller companies have been exempt, with the onus falling instead on the contractor’s own personal service company. The April 2026 changes significantly raise the bar for what constitutes a “small” company, meaning many more businesses will now fall beneath that threshold and be freed from compliance duties.
A wider net for the small company exemption
Previously, a company qualified as small if it met at least two of three criteria: annual turnover of no more than £10.2 million, a balance sheet total of no more than £5.1 million, and no more than 50 employees. From April 2026, the turnover ceiling rises to £15 million and the balance sheet limit to £7.5 million, whilst the headcount threshold remains unchanged at 50 staff. The consequence is that a significant number of businesses that were previously classified as medium-sized will now be treated as small, and the obligation to issue a Status Determination Statement – the legal document setting out whether a contractor sits inside or outside IR35 – will pass back to the contractor.
Vincent Huguet, chief executive and co-founder of Malt, the European freelance talent platform, welcomes the reforms but sounds a note of caution. The shift in thresholds, he says, helps to move responsibility away from hiring managers, allowing them to concentrate on when and what they need rather than worrying about the tax implications of every engagement. Yet he warns that neither companies nor freelancers should become complacent.
The end of double taxation?
Alongside the threshold changes, the government is introducing a PAYE set-off mechanism designed to address one of the more contentious aspects of the existing rules. Until now, where a client failed to apply IR35 correctly, HMRC could pursue the full PAYE and National Insurance bill from the deemed employer without accounting for tax already paid at the contractor’s end through their personal service company. The new mechanism allows HMRC to offset those prior payments when calculating any outstanding liability.
Huguet describes this as an important step towards eliminating double taxation, noting that it removes the risk of a freelancer ending up paying more than their fair share and properly accounts for historic tax records.
Pricing: the freelancer’s blind spot
For contractors, however, the real sting may lie in the detail of their own rate cards. With a greater share of compliance responsibility now resting with them, freelancers must ensure their pricing properly reflects the full cost of engagement. Last year’s increase in employer National Insurance Contributions from 13.8 per cent to 15 per cent, coupled with the reduction in the payment threshold from £9,100 to £5,000 annually, has already made hiring more expensive. Because employer NIC is deducted from the assignment rate before a contractor’s pay is calculated, those costs feed directly into negotiations – whether the contractor is deemed inside or outside IR35.
Huguet’s message to freelancers is blunt: get your pricing right. Those who fail to factor in these shifting obligations risk undervaluing their services at precisely the moment when the regulatory landscape demands they take greater ownership of their tax affairs. For businesses, particularly those that find themselves newly reclassified as small, the changes offer a chance to engage freelance talent with less red tape – but only if both sides of the arrangement understand what is now expected of them.
Read more:
Thousands of growing firms freed from IR35 burden – but freelancers warned not to underprice