IR35 Changes Explained: Timeline, Tax Rates and What Contractors Need to Know

IR35 has changed more than almost any other piece of UK tax legislation since its introduction in 2000. Each set of IR35 changes has shifted responsibility, raised the stakes for contractors and created new compliance demands for the businesses that hire them. Understanding the full picture, including when the rules changed, how much tax inside IR35 actually costs and what the 2025 update means in practice, is now essential for any contractor operating through a limited company.

Latest IR35 news and updates

The most significant recent IR35 update is the change to small company thresholds that took effect from April 2025 under revised Companies Act definitions. Because IR35 assessments rely on the client’s previous year accounts, contractors started feeling the practical effect from April 2026 onwards. Many engagements previously determined as inside IR35 by medium-sized clients are now being reassessed as those clients drop into the small company category and pass responsibility back to the contractor’s company.

HMRC has also confirmed that mandatory payrolling of benefits in kind becomes compulsory from April 2026. Benefits such as private medical cover, previously reported on a P11D form, must now be processed through payroll. This affects inside IR35 engagements where benefits are part of the package and adds a compliance step for agencies and deemed employers.

HMRC continues active IR35 enforcement, particularly in IT, financial services and professional services. HMRC’s own figures show that off-payroll working rule reforms have moved over 130,000 workers into deemed employment tax status since 2021, and the compliance focus across supply chains remains a priority.

IR35 legislation: what the law actually says

IR35 sits within the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), specifically Chapter 8 (worker’s services provided through an intermediary) and Chapter 10 (off-payroll working in the public and private sector). The original IR35 legislation was introduced through the Finance Act 2000, implementing proposals set out in Inland Revenue press release 35 from 1999, which is where the name comes from.

The legislation targets arrangements where a worker provides services to a client through an intermediary (usually a personal service company or limited company) and the relationship would be one of employment if the intermediary were removed. When IR35 applies, the intermediary must calculate a deemed employment payment and account for PAYE and National Insurance as if the worker were an employee.

The 2017 and 2021 off-payroll working reforms did not replace the original IR35 legislation. They added Chapter 10 to ITEPA 2003, shifting who holds the compliance responsibility for medium and large engagements. The original Chapter 8 rules still apply to small company engagements and to contractors who self-assess.

When did IR35 rules change? A complete timeline

April 2000: IR35 introduced. Contractors assessed their own status and paid a deemed payment to HMRC if inside. Enforcement was minimal and compliance rates were low.

April 2017: The first major change. Public sector bodies (government departments, NHS trusts, local authorities) became responsible for determining contractor IR35 status. Agencies became liable for deducting PAYE if the engagement was inside IR35. Many public sector clients defaulted to blanket inside determinations, causing significant income drops for contractors in those roles.

April 2021: Off-payroll working rules extended to medium and large private sector companies. This was the most consequential IR35 change since 2000. End clients must now issue a Status Determination Statement (SDS) for each engagement and pass it down the supply chain. Small companies remained exempt.

September 2022: Chancellor Kwasi Kwarteng’s mini-budget announced the 2017 and 2021 reforms would be repealed from April 2023, returning status determination to contractors. The announcement caused brief optimism in the contractor market before contributing to significant financial market turbulence.

October 2022: New Chancellor Jeremy Hunt reversed the repeal. The 2021 rules remained in force and the proposed April 2023 change never happened. Contractors and clients spent weeks preparing for a change that did not materialise.

April 2025: The Companies Act definitions of small, medium and large companies were updated, raising the thresholds used across UK company law. The small company exemption for IR35 is tied to these definitions, so more businesses now qualify as small. Contractors working for newly small clients can once again self-assess their own IR35 status.

April 2026: Mandatory payrolling of benefits in kind comes into force. Benefits such as private medical cover must be processed through payroll rather than reported on a P11D form, adding compliance obligations for deemed employers managing inside IR35 engagements.

The 2025 small company threshold update

The most recent IR35 update is the April 2025 change to company size thresholds. Under the new Companies Act definitions, a company is small if it meets two of the following three criteria:

• Annual turnover of £15m or less (previously £10.2m)
• Balance sheet total of £7.5m or less (previously £5.1m)
• No more than 50 employees (unchanged)

Because IR35 exemption status depends on the client’s accounts from the previous financial year, contractors began feeling the practical effect of this change from April 2026. A client whose turnover sits between £10.2m and £15m, for example, moved from medium to small when its 2025 accounts were finalised, shifting IR35 responsibility back to the contractor’s personal service company.

This matters because contractors working for newly small clients no longer receive an SDS and are responsible for making their own accurate determination. The risk profile changes but so does the flexibility.

IR35 tax rules: what you actually pay

One of the most searched IR35 questions is what the actual tax rate is. There is no single number, but the difference between inside and outside IR35 is significant.

Outside IR35, a contractor earning £100,000 a year through a limited company typically takes a salary of around £12,570 and draws the remainder as dividends. After corporation tax and dividend tax, the effective rate on the total income is around 25 to 30%, leaving take-home pay of roughly £70,000 to £75,000.

Inside IR35, the same £100,000 is treated as employment income. Income tax applies at 20% on the first £37,700 above the personal allowance and 40% on earnings above £50,270. Employee National Insurance applies at 8% up to £50,270 and 2% above. The fee-payer also pays employer National Insurance at 13.8% on top of the gross pay, which reduces the amount available to the contractor in the first place.

In practice, a contractor inside IR35 on a £100,000 contract typically takes home between £55,000 and £60,000. The gap of £10,000 to £20,000 is the real cost of an inside IR35 determination, which is why getting status right matters so much.

IR35 changes for self-employed contractors and sole traders

IR35 applies to workers who operate through an intermediary, usually a limited company or personal service company. It does not apply directly to genuine sole traders who invoice clients without a company structure. However, the line between self-employment and disguised employment is one HMRC examines closely.

If you are self-employed and work through your own limited company, the IR35 rules apply to you in the same way as any other contractor. If you trade as a sole trader and invoice directly, IR35 does not apply, but HMRC’s employment status rules can still lead to an investigation if the relationship looks more like employment than genuine self-employment.

The key differences are that sole traders pay Class 4 National Insurance rather than employer and employee NI, and they cannot take dividends. For sole traders wondering whether IR35 affects them, the short answer is: it does not, but employment status does, and the tests HMRC uses are similar.

The PAYE set-off mechanism

One of the more technical IR35 changes introduced alongside the 2021 reforms is the PAYE set-off mechanism. Before this, if a client incorrectly classified a contractor as outside IR35 and HMRC later determined the engagement should have been inside, HMRC would demand the full PAYE and National Insurance bill from the deemed employer with no credit for tax the contractor had already paid.

The set-off mechanism changes this. HMRC now offsets tax already paid by the contractor’s personal service company (corporation tax, dividend tax, personal income tax) against the PAYE liability of the deemed employer. The contractor does not receive a direct refund, but the deemed employer’s bill is reduced by the amount already paid into the system.

The process works through a direction notice. Once HMRC determines that IR35 should have applied, it issues a direction to the client or agency confirming that set-off will be considered, then calculates the revised liability using the contractor’s historical tax records. Contractors can appeal if the direction inaccurately represents what they actually paid.

How IR35 status is determined

Whether an engagement falls inside or outside IR35 comes down to the nature of the working relationship, not just what the contract says. HMRC focuses on three tests.

Personal service examines whether the contractor must personally carry out the work or can send a qualified substitute. A genuine substitution right that has actually been exercised in practice is strong evidence of outside IR35 status. A substitution clause that exists only on paper carries very little weight.

Control looks at who decides what work is done, when, where and how. A contractor who sets their own hours, chooses their working location and decides the method of delivery is more likely to be outside IR35 than one who follows the client’s direction day to day.

Mutuality of obligation considers whether there is an ongoing expectation of work from the client and acceptance from the contractor. Employment relationships typically involve this expectation. Project-based engagements with a defined deliverable and no guaranteed follow-on work point more clearly toward outside IR35.

No single test determines the outcome. HMRC and tribunals look at the full picture, and working practices that contradict the written contract will undermine an outside IR35 position.

What contractors should do now

The combination of the 2025 threshold changes, rising employer NIC costs and mandatory payrolling from 2026 means the IR35 landscape is shifting again. Contractors working in IT, financial services, engineering and professional services are most likely to be affected because these sectors have the highest concentration of personal service company engagements and the most active HMRC enforcement.

Reviewing each contract against the three status tests, checking whether clients have moved into the small company category, and keeping clear records of working practices gives the strongest foundation. Where contracts are borderline, a professional IR35 review provides both guidance and a paper trail that demonstrates reasonable care if HMRC investigates.

Frequently asked questions

What are the IR35 changes and when did IR35 rules change?

IR35 was introduced in April 2000. The main changes were in April 2017 (public sector clients took on status determination), April 2021 (extended to medium and large private sector), October 2022 (proposed repeal reversed), and April 2025 (small company thresholds increased to £15m turnover and £7.5m balance sheet).

What is the IR35 tax rate?

There is no single rate. Inside IR35 means your income is taxed as employment income: income tax at 20%, 40% or 45% plus employee and employer National Insurance. A contractor on a £100,000 contract inside IR35 typically takes home £55,000 to £60,000 compared with £70,000 to £75,000 outside IR35 using a salary and dividend structure.

What changed with IR35 in April 2025?

The small company exemption thresholds increased. The turnover limit rose from £10.2m to £15m and the balance sheet limit from £5.1m to £7.5m. More clients now qualify as small and are exempt from issuing a Status Determination Statement, so more contractors self-assess their own status.

What is the IR35 update on PAYE set-off?

The set-off mechanism lets HMRC credit tax already paid by the contractor’s personal service company against a PAYE liability owed by the deemed employer if a status determination is later found to be wrong. It prevents double taxation but does not give the contractor a direct refund.

What happened with the IR35 repeal in 2022?

Kwasi Kwarteng’s September 2022 mini-budget announced the 2021 reforms would be repealed from April 2023. Jeremy Hunt reversed the decision in October 2022. The repeal never happened and current rules remain those introduced in 2021.

Does IR35 apply to small company clients?

No. From April 2025, a client is small if it meets two of: turnover of £15m or less, balance sheet of £7.5m or less, 50 or fewer employees. Small clients are exempt from the off-payroll working rules and the contractor’s own company determines IR35 status.

What are the three IR35 tests?

Personal service (can you substitute?), control (does the client direct how you work?) and mutuality of obligation (is there an expectation of ongoing work?). No single test is conclusive and HMRC looks at the overall working relationship.

How does mandatory payrolling of benefits affect IR35 contractors?

From April 2026, benefits in kind must be processed through payroll rather than a P11D. This affects contractors working inside IR35 who receive benefits such as private medical cover, as the timing and method of taxation changes.

What should I do if I disagree with an SDS?

Use the client’s formal disagreement process. They must respond within 45 days. If they do not, or the response is unsatisfactory, you can escalate to HMRC. Keep all correspondence and evidence of your actual working practices throughout.

How do I protect my outside IR35 status?

Use a well-drafted contract with a genuine substitution clause, ensure your working practices match the contract, document evidence of control, substitution and project-based delivery, run the CEST tool and keep a record of the result. For high-value or long-running contracts, get a professional IR35 review to demonstrate reasonable care.