Off payroll working, still widely known by its older name, IR35, has just seen its biggest shake up since the private sector reform of 2021. Two separate changes took effect from 6 April 2026, one raising the company size thresholds that decide who has to apply the rules, and a completely new set of liability rules aimed squarely at umbrella companies. Together they change the risk picture for contractors, the businesses that engage them, and the recruitment agencies that sit in between.
Disclaimer: This article is for general information only and reflects HMRC guidance and legislation confirmed for the 2026/27 tax year at the time of writing. Employment status and off payroll working rules are highly fact specific. Always seek specific advice tailored to your own arrangements.
This article explains what IR35 and off payroll working actually mean, the two significant changes that took effect in April 2026, and what practical steps contractors, engaging businesses and agencies should be taking now.
A Quick Recap of Off Payroll Working
Off payroll working rules exist to make sure that someone who works like an employee, but supplies their services through an intermediary such as their own personal service company, pays broadly the same Income Tax and National Insurance as someone employed directly. Where an engagement is genuinely one of self employment, it is described as outside IR35, and the contractor's company handles its own tax in the normal way. Where an engagement is really disguised employment, it is described as inside IR35, and PAYE and National Insurance must be operated on the payments made for that work.
Since April 2021, medium and large private sector organisations, along with the public sector, have carried the responsibility for deciding this status themselves, rather than leaving it to the contractor's own company to self assess. This decision must be recorded in a Status Determination Statement, issued to both the worker and any agency in the chain, and the fee payer in the chain becomes responsible for operating PAYE where an engagement is found to be inside IR35.
Small companies, defined by reference to the Companies Act thresholds for company size, have always been exempt from this responsibility. Where a client qualifies as small, the responsibility for assessing IR35 status reverts to the worker's own personal service company, exactly as it worked before the 2021 reform.
Change One: The Small Company Threshold Has Risen
From 6 April 2026, the Companies Act thresholds used to define a small company for the purposes of the off payroll working exemption increased. The relevant turnover threshold rose to £15 million, up from £10.2 million, and the balance sheet total threshold rose to £7.5 million, up from £5.1 million. A company remains classed as small provided it meets at least two of the relevant size criteria.
This sounds like a technical accounting change, but its practical effect is significant. It is estimated that around 14,000 companies that previously counted as medium or large under the old thresholds now qualify as small. For every one of those businesses, the responsibility for determining IR35 status shifts away from the company and back to the contractor's own personal service company.
This matters because responsibility for getting the determination wrong shifts along with it. Where a client determines status and gets it wrong, the tax liability generally sits with the client or the fee payer in the chain. Where the worker's own company self assesses, any liability if HMRC disagrees sits with that company, and ultimately with the contractor.
Worked Example 1: A Business Newly Classed as Small
Ferrow Engineering Ltd has turnover of £13 million and a balance sheet total of £6.8 million. Under the thresholds that applied before April 2026, it was classed as a medium sized company and was required to issue Status Determination Statements for every contractor it engaged through a personal service company.
From 6 April 2026, both figures fall below the new £15 million turnover and £7.5 million balance sheet thresholds, so Ferrow Engineering Ltd now qualifies as small. It is no longer required to determine the IR35 status of the contractors it engages. Instead, each contractor's own personal service company becomes responsible for assessing whether the engagement falls inside or outside IR35, and for operating PAYE itself if it decides the engagement is inside.
Ferrow Engineering Ltd should not treat this as the end of the story from a governance point of view. While the formal determination responsibility has moved, many businesses in this position still choose to maintain some oversight of how contractors are engaged, partly to manage other risks such as the new umbrella company rules described below, and partly because a wrongly self assessed contractor arrangement can still create reputational and commercial complications even where the direct tax liability sits elsewhere.
Change Two: New Liability Rules for Umbrella Companies
The second major change addresses a completely different part of the labour supply chain. Many businesses that engage contractors, particularly those found to be inside IR35, route the arrangement through an umbrella company, which formally employs the worker and operates PAYE on their behalf. Because the umbrella company itself runs payroll, these arrangements have historically sat outside the off payroll working rules altogether.
The problem HMRC has been tackling is that a minority of umbrella companies have not properly operated PAYE, sometimes through error and sometimes deliberately, leaving unpaid tax that HMRC has often struggled to recover, occasionally pursuing the worker personally for amounts they had no way of knowing were unpaid.
From 6 April 2026, new rules introduce joint and several liability for PAYE and National Insurance that an umbrella company fails to account for. Where a UK based recruitment agency sits in the supply chain, that agency becomes liable for the shortfall if the umbrella fails to pay HMRC correctly. Where there is no UK agency in the chain, liability passes instead to the end client. This is a marked change from the previous position, where HMRC generally had to pursue the umbrella company itself, or in the worst cases the individual worker.
Worked Example 2: Liability Passing to an Agency
Halden Recruitment places a contractor with a client through Zenith Umbrella Ltd, which employs the contractor directly and is responsible for operating PAYE on their pay. During 2026/27, Zenith Umbrella Ltd underpays PAYE and National Insurance on a number of workers, including this contractor, before ceasing to trade.
Under the rules that applied before April 2026, HMRC's primary route to recover this shortfall would have been against Zenith Umbrella Ltd itself, with limited practical prospect of recovery once it had ceased trading. Under the rules from April 2026, because Halden Recruitment is the UK based agency in the supply chain, HMRC can pursue Halden Recruitment directly for the unpaid PAYE and National Insurance, regardless of the fact that Halden Recruitment was not the party operating the payroll.
This is why agencies and end clients are now being strongly advised to carry out proper due diligence on any umbrella company in their supply chain, rather than assuming that using an umbrella removes payroll risk entirely.
What Businesses Should Do Now
Businesses engaging contractors through personal service companies should reconfirm their company size classification under the new thresholds, since this determines whether they still need to issue Status Determination Statements at all. Where a business has moved into the small company category, it is worth documenting that assessment clearly, since it may need to be evidenced if a contractor or HMRC later queries why no determination was issued.
Where a business, agency or client uses umbrella companies anywhere in its labour supply chain, mapping that supply chain and carrying out due diligence on each umbrella involved is now a genuine financial protection measure, not just good practice. This includes checking that an umbrella is properly registered, reviewing its compliance credentials, and understanding how payments flow through the chain before relying on it.
Where a business remains medium or large and continues to determine IR35 status directly, the underlying tests have not changed. Genuine control over how, when and where work is done, a realistic right of substitution, and the absence of mutuality of obligation beyond the specific engagement all continue to point towards a genuinely self employed, outside IR35 arrangement.
Frequently Asked Questions
Does the small company threshold change mean I no longer need to worry about IR35 at all?
Not quite. It means the responsibility for making the determination moves from your business to the contractor's own company. If you are the fee payer, you may still have some exposure if it later emerges that your business was not actually small under the rules, so it is worth having your accountant confirm your classification rather than assuming it.
How do I know if my company is now classed as small under the new thresholds?
You need to meet at least two of the three size criteria, turnover of no more than £15 million, balance sheet total of no more than £7.5 million, and no more than 50 employees, generally assessed over two consecutive financial years. CoreAcc Accountants can confirm your classification as part of a wider compliance review.
If I am a contractor working through my own limited company, does anything change for me?
If your client has moved from medium or large to small under the new thresholds, you now need to self assess your own IR35 status for that engagement, rather than relying on a determination from the client. This is a meaningful change in responsibility, since any liability if HMRC disagrees with your assessment now sits with your own company rather than the client's.
What should I do if I use an umbrella company and I am worried about the new liability rules?
If you are a contractor being paid through an umbrella company, the new rules are generally designed to protect you, by giving HMRC a stronger route to recover unpaid tax from the agency or client rather than pursuing you personally. If you are an agency or end client placing workers through umbrella companies, you should be actively reviewing which umbrellas you use and carrying out proper due diligence on their compliance.
Can a contractor still choose to work through an umbrella company by choice rather than because they are inside IR35?
Yes, some contractors choose umbrella arrangements for simplicity even where their engagement might otherwise be assessed as outside IR35. This remains possible, though the new liability rules mean the businesses placing that contractor now carry more responsibility for making sure the umbrella they use is genuinely compliant.
Does the CEST tool still matter for IR35 determinations?
HMRC's Check Employment Status for Tax tool remains available and is still commonly used as part of the determination process, though it is only one input into the decision and its output is not always accepted by HMRC if the underlying facts do not support it. A determination based purely on a CEST result without proper consideration of the actual working arrangements carries real risk.
What happens if my business gets an IR35 determination wrong?
Where a medium or large business incorrectly determines that an engagement is outside IR35 when it should have been inside, HMRC can pursue the business, or the relevant fee payer in the chain, for the PAYE and National Insurance that should have been deducted, along with penalties in cases of carelessness or deliberate error. This is why documented, consistent decision making, rather than informal judgement calls, matters so much in this area.
What CoreAcc Accountants Can Help You With
Whether you are a contractor working out whether your client's new small company status changes your own responsibilities, or a business reassessing your size classification and your exposure to the new umbrella company liability rules, CoreAcc Accountants helps clients navigate both sides of off payroll working. We review company size classifications, help structure and document IR35 status determinations properly, and advise on supply chain due diligence for businesses using umbrella companies or agencies.
Get in Touch
The April 2026 changes have shifted risk and responsibility across the whole contractor supply chain, not just for one side of it. Contact CoreAcc Accountants to review where your business or your contracting arrangement now stands.
CoreAcc Accountants is an ACCA accredited firm of Chartered Certified Accountants based in Borehamwood, Hertfordshire. This article was published in September 2026 and reflects HMRC guidance and legislation confirmed for the 2026/27 tax year at the time of writing. It does not constitute professional or legal advice. Always seek specific advice tailored to your individual circumstances.
