If you are a UK tech contractor working, or about to start working, with a mid-sized client, something changed on 6 April 2026 that could be worth over £25,000 to you per year. The UK government raised the threshold that defines a “small company” for IR35 purposes, and thousands of companies just crossed that line.
Small companies are exempt from the off-payroll working rules (IR35 Chapter 10 reform). That exemption means one thing: you, through your Personal Service Company (PSC), are responsible for determining your own IR35 status again, not them. If your working practices genuinely support outside IR35, you can self-declare and operate through your limited company accordingly. No more forced umbrella payroll. No more blanket “inside IR35” determinations. If you are new to IR35 and want to understand how inside and outside determinations work before diving into the threshold mechanics, our inside vs outside IR35 guide covers the fundamentals.
What changed on 6 April 2026
The Companies Act 2006 thresholds defining a “small” company were raised for the first time since 2013. The change means approximately 14,000 companies previously classified as medium-sized are now legally small, and therefore exempt from making IR35 determinations for their contractors.
Small company threshold: before & after
Companies meeting 2 of 3 criteria qualify as small · Updated 6 April 2026
| Criterion | Before Apr 2026 | From Apr 2026 | Changed? |
|---|---|---|---|
| Annual turnover | Under £10.2M | Under £15M | Raised ↑ |
| Balance sheet total | Under £5.1M | Under £7.5M | Raised ↑ |
| Employee headcount | Fewer than 50 | Fewer than 50 | Unchanged |
The “2 of 3” rule: how to read it
A company does not need to pass all three tests. It only needs to meet any two out of three. This is crucial. A company with 35 employees, £14M turnover, and £8M on the balance sheet meets the headcount and turnover tests, so it qualifies as small, and IR35 Chapter 10 does not apply. A company with 60 employees but turnover under £15M and balance sheet under £7.5M also qualifies.
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Annual turnover
Under £15M
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Balance sheet total
Under £7.5M
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Employee headcount
Fewer than 50
What this is worth to you: the take-home difference
The gap between inside IR35 (umbrella payroll) and outside IR35 (limited company, optimal salary/dividend structure) is not marginal. At common tech contractor day rates, the annual difference ranges from £17,000 to over £31,000. That is the cost of being trapped inside IR35 with a company that is now legally exempt from making that determination.
Monthly take-home: inside IR35 vs outside IR35
Estimated figures · 230 billable days · 2026/27 UK tax rates · Single, standard personal allowance
| Day rate | Inside IR35/month Umbrella payroll | Outside IR35/month Ltd company | Monthly gain | Annual gain |
|---|---|---|---|---|
| £500/day £115,000/yr gross | £5,800 £69,600/yr | £7,200 £86,400/yr | +£1,400 | +£16,800/yr |
| £700/day £161,000/yr gross | £7,800 £93,600/yr | £9,900 £118,800/yr | +£2,100 | +£25,200/yr |
| £900/day £207,000/yr gross | £9,800 £117,600/yr | £12,400 £148,800/yr | +£2,600 | +£31,200/yr |
Annual gain from outside vs inside IR35 by day rate
What actually counts toward the small company test
This is where contractors get tripped up. The test applies to the end-client, the company that actually receives your services, not the agency or staffing firm that placed you. Group company rules also apply, which can aggregate turnover across subsidiaries.
The contracting client's annual turnover
It's the end-client's size that matters, not the agency or your PSC.
The client's UK parent company only
For group companies, group-level turnover may be aggregated. Check with an accountant.
Balance sheet total (fixed + current assets)
Must be under £7.5M independently of turnover.
Number of employees on client payroll
Fewer than 50, contractors placed via agencies don't count toward this.
Your own PSC's size
Your personal service company's size is irrelevant to the exemption.
Agency size (if placed via recruiter)
Only the end-client who receives your services determines small company status.
Your 45-day right: how to confirm your client's size
You cannot just assume a company is small. You need to confirm it, ideally before the contract starts. Here is the process that most contractors do not know they have the legal right to follow.
The 45-day process, step by step
Send a written request
Write to your end-client (not the recruiter or agency) asking them to confirm their company size. Request a formal response confirming whether they meet the 'small company' criteria under the Companies Act 2006 as amended.
Start the 45-day clock
Under the off-payroll working rules, the client has 45 days to respond. Document the date you sent your request. Keep a copy of everything.
If they confirm small
Get it in writing. Their confirmation shifts IR35 determination responsibility back to you. Your PSC can now self-determine outside IR35, but your working practices must genuinely support that status.
If they don't respond
Silence is not safe, but it does shift responsibility. If a client fails to respond within 45 days they lose the benefit of the small company exemption for that engagement. Document this carefully if you ever need it.
Get a contract review
Once confirmed as small-company exempt, have a specialist IR35 reviewer (Qdos, IPSE) assess your contract before signing. The written contract is the first thing HMRC looks at.
Important: Small company status only removes the client's obligation to determine IR35. It does not mean you are automatically outside IR35. Your working practices must genuinely support outside status. HMRC can still investigate and challenge your self-determination if it does not reflect reality.
Who does this change not help?
For all the opportunity this creates, there are clear categories of contractor who should not assume this applies to them.
- Contractors at large enterprises. Banks, Big Tech, FTSE 100, major public sector bodies, none of these come close to the small company thresholds. Chapter 10 off-payroll rules still apply in full. Their IR35 determinations are still theirs to make.
- Public sector contractors. Public sector bodies have been subject to their own IR35 rules since 2017. The small company exemption is for private sector only. HMRC's CEST tool, with all its limitations, is still the de facto public sector standard.
- Contractors via agencies with large end-clients. If the agency is large but the actual end-client is small, the end-client's size governs. But if the agency itself is large and acts as the fee-payer, seek specialist advice, the chain of intermediaries matters.
- Anyone with an existing inside determination. If your current contract has an inside IR35 determination from a company that was medium-sized before April 2026, the new thresholds apply going forward, not retroactively. At renewal or for new engagements, the new rules apply.
What to do now: a practical checklist
Check your current client's latest filed accounts at Companies House.
Turnover and balance sheet figures are publicly available. This takes five minutes and gives you the data to assess small company status before you ask.
Write to the end-client and ask for written confirmation of their company size.
Verbal assurances mean nothing. You need documented confirmation to rely on the exemption. Do this before the contract starts or at renewal.
Get an IR35 contract review if you want to self-declare outside.
A specialist reviewer (Qdos, IPSE Protect) will assess your contract for the key IR35 indicators. Expect to pay £99–£250. Worth every penny at these day rates.
Update your working practice documentation.
HMRC investigates how the contract works in practice, not just on paper. Keep records of your independence: your right to substitution, absence of set hours, multiple clients, etc.
Run your numbers through the IR35 calculator.
Quantify your exact gain before you invest time in the process. The difference varies significantly by day rate and individual tax situation.
See your exact take-home with our IR35 calculator
Enter your day rate and working days to see the precise monthly and annual difference between inside and outside IR35, including corporation tax, dividend tax, and effective rate, for 2026/27 UK tax rates.
Open IR35 Calculator