On 6 April 2026, the UK government implemented the first increase to the Companies Act 2006 small company size thresholds since 2013. The change - roughly doubling the turnover and balance sheet limits - means that approximately 14,000 businesses have been reclassified from “medium” to “small.” For UK contractors, this is one of the most significant IR35 developments since the 2021 private sector reform.
The new small company thresholds
A company qualifies as small if it satisfies at least two of the following three conditions (based on its most recent set of accounts):
| Criterion | Before 6 April 2026 | From 6 April 2026 |
|---|---|---|
| Annual turnover | ≤ £10.2 million | ≤ £15 million |
| Balance sheet total | ≤ £5.1 million | ≤ £7.5 million |
| Employees | ≤ 50 | ≤ 50 (unchanged) |
Two of the three criteria must be satisfied. A business with turnover of £12 million and 40 employees - which would have been medium under the old limits - now qualifies as small if its balance sheet also falls below £7.5 million.
What small company status means for IR35
The off-payroll working rules (Chapter 10 ITEPA 2003) that have applied to the private sector since April 2021 include a specific exemption for small companies. Where the end client is a small business (as defined by the Companies Act 2006), the Chapter 10 rules do not apply. Instead, the original Chapter 8 rules apply - meaning the contractor's own PSC is responsible for assessing IR35 status and paying any resulting tax.
In practical terms, this means:
- For contractors: If your client has reclassified as small, you - via your PSC - are now responsible for your own IR35 assessment. You no longer have a Status Determination Statement from the client. You must assess the engagement yourself and ensure any resulting tax is paid through your PSC.
- For clients: If you have reclassified as small, you no longer need to issue SDSs to contractors or operate a disputes process. However, you should communicate this to your contractor supply chain promptly and clearly to avoid confusion.
- For agencies:Where the end client is small, the fee-payer (usually the agency) is no longer required to deduct PAYE and NI from contractor payments, assuming the agency has properly verified the client's small status.
Caution
Just because your client is now small does not mean you are automatically outside IR35. It means you determine your status. HMRC can still investigate a PSC that fails to correctly assess an inside-IR35 engagement. If anything, the shift to self-assessment makes a thorough documented assessment more important, not less.
Which businesses have reclassified?
The reclassification primarily affects private companies with annual turnover between £10.2 million and £15 million, or with balance sheets between £5.1 million and £7.5 million. This typically captures businesses in the mid-market: regional law firms, manufacturing businesses, professional services firms, tech scale-ups, and owner-managed businesses that have grown beyond the old thresholds.
Large companies - typically those with turnover above £36 million or balance sheets above £18 million - are unaffected. The major corporate clients that have historically run the most complex contractor supply chains remain subject to Chapter 10 in full.
What contractors should do now
- Verify your client's size classification. Ask directly, or check their most recent filed accounts at Companies House. Do not assume size from company name or headcount alone.
- Carry out a thorough self-assessment if your client is now small. The responsibility is on your PSC. A documented assessment using current case law - including PGMOL [2024] - is both good practice and your best protection if HMRC investigates.
- Keep records. Document your assessment and the working practices it reflects. If HMRC challenges the assessment years later, contemporaneous records are invaluable.
- Review contracts. Contracts that were drafted on the basis of a medium-company SDS may need reviewing. Clauses about control, substitution, and financial risk should reflect the actual arrangement.
What clients and agencies should do
- Confirm your Companies Act 2006 size status based on your most recently filed accounts
- Notify your contractor workforce and any agencies in the supply chain of your classification
- Update your standard contractor agreements to remove or amend SDS-related provisions if you are now small
- Take specialist advice if you are close to the thresholds - a company that moves between small and medium in different years creates complexity for contractors
Frequently asked questions
What are the new small company thresholds from April 2026?
A company is small if it meets at least two of: turnover ≤ £15 million, balance sheet ≤ £7.5 million, or ≤ 50 employees. These doubled the previous turnover and balance sheet limits.
If my client is now small, do I still need an IR35 assessment?
Yes - but the responsibility moves to your PSC. You must assess your own status under Chapter 8 ITEPA 2003. HMRC can still investigate if you get it wrong.
How do I find out if my client is now small?
Ask your client directly, or check their filed accounts at Companies House. Larger private companies publish annual reports. Take professional advice if you are uncertain or the client declines to confirm.
Does the reclassification take effect immediately from April 2026?
The change applies from 6 April 2026. A company qualifies as small based on its most recent filed accounts. If those accounts satisfy the new criteria, the responsibility shift applies from that date.
What if my client incorrectly tells me they are small?
If a client fraudulently or negligently misrepresents their size, liability can transfer back to them. Your PSC should take reasonable steps to verify size - a verbal assurance alone is not enough.