IR35 in 2026: A Guide for Employers and Contractors

IR35, officially the off-payroll working rules, determines whether a contractor working through a personal service company (PSC) should be taxed like an employee for a given engagement. Get it wrong, and either the contractor's limited company or the hiring business can be left facing a large, unexpected tax bill. This guide breaks down what IR35 actually requires in 2026, for both sides of the engagement.

What IR35 actually is

IR35 exists to stop "disguised employment": someone who works like a permanent employee, but is paid through an intermediary (usually their own limited company) to avoid PAYE tax and National Insurance. If, stripping out the intermediary, HMRC would consider the relationship to be one of employment, the engagement falls inside IR35 and must be taxed accordingly.

Two separate regimes sit under the IR35 name: the original rules, which still apply to engagements with small private-sector clients, and the off-payroll working rules (OPWR), introduced for the public sector in 2017 and extended to medium and large private-sector clients in April 2021. The key difference is who is responsible for making the status determination.

Who's responsible for what

Responsibility depends on the size of the client:

• Small private-sector clients: the contractor's own intermediary decides IR35 status, under the original rules.
• Medium and large private-sector clients, and all public-sector bodies: the end client must determine status and issue a Status Determination Statement (SDS).
• The fee payer: whoever pays the intermediary (the end client or an agency in the chain) must operate PAYE and deduct tax and employee National Insurance if the engagement is inside IR35, and pay employer NICs on top.

A private-sector business counts as medium or large if it meets at least two of: turnover above £15 million, a balance sheet total above £7.5 million, or more than 50 employees. Full detail is in HMRC's guidance on understanding off-payroll working.

What's changing in 2026 and 2027

Two developments are reshaping the landscape:

• Higher small-company thresholds: from 6 April 2026, the turnover threshold for the small-company exemption rises from £10.2m to £15m, and the balance-sheet threshold rises from £5.1m to £7.5m (headcount stays at 50). Because the test looks at the previous financial year, most businesses won't feel the effect until the 2027/28 tax year, but it's worth reviewing your classification now.
• Umbrella company PAYE liability shifts: also from 6 April 2026, agencies and end clients become jointly and severally liable if an umbrella company fails to correctly account for PAYE and NICs on contractors they place. This raises the bar on due diligence when engaging labour through umbrella arrangements.

Inside or outside? The tests that actually matter

The written contract matters, but HMRC and employment tribunals look at how the engagement actually works in practice. The core tests are:

• Control: how much say does the client have over what, how, when and where the contractor works? The more direction, the more it looks like employment.
• Substitution: can the contractor genuinely send a substitute to do the work, or must they deliver it personally? A real, unfettered right of substitution is one of the strongest indicators of self-employment.
• Mutuality of obligation: is the client obliged to keep offering work, and the contractor obliged to accept it? Ongoing mutual obligation looks like employment; discrete, deliverable-based engagements don't.
• Financial risk: does the contractor bear any risk (fixed-price work, correcting errors unpaid, providing their own equipment), or are they simply paid for time like an employee?
• Integration: is the contractor embedded in the organisation's structure (reporting lines, appraisals, staff benefits, company email signatures), or clearly operating as an outside business?

HMRC's Check Employment Status for Tax (CEST) tool can help structure this analysis, and HMRC will stand by a CEST outcome if the answers accurately reflect the real working arrangement. But CEST doesn't always give a conclusive answer, and it doesn't replace the client's duty to take reasonable care.

A guide for employers

For medium and large organisations, IR35 is now a governance responsibility, not a payroll afterthought.

• Assess every engagement individually. Blanket determinations ("all contractors are inside IR35") don't meet the reasonable care standard and can be successfully challenged.
• Issue a compliant SDS before the first payment, explaining the reasons for the determination, not just the conclusion, to the contractor and any agency in the chain.
• Run a disagreement process: if a contractor or agency disputes the SDS, you must respond within 45 days or liability for the deduction shifts back to you.
• Align contracts with reality: a contract that grants substitution rights or independence means little if day-to-day management treats the contractor as a direct report.
• Review determinations when circumstances change: a change in duties, supervision, location or duration can flip the outcome.
• Check your umbrella company supply chain: from April 2026 you can be held liable for their PAYE failures too.

Getting this wrong is expensive: HMRC can pursue unpaid Income Tax, employee and employer National Insurance, interest, and penalties. If reasonable care wasn't taken, that liability sits with the business, not the contractor.

A guide for contractors

If you operate through a personal service company, the determination is largely out of your hands for medium and large clients, but you're not powerless.

• Get the SDS in writing and read the reasoning, not just the verdict: a document that simply states "inside" or "outside" without explanation isn't valid and can be challenged.
• Check the contract against how you actually work: if it grants a right of substitution or control over your own hours, make sure that's genuinely how the engagement runs, since HMRC looks past the paperwork.
• Understand your position with small clients: outside the public sector, if your end client is genuinely small, responsibility for determining your own status still sits with your intermediary, not them.
• Use the 45-day disagreement window if you think a determination is wrong. Silence from the client past that point shifts deduction liability back onto them, which strengthens your position.
• Be wary of schemes promising to "beat" IR35. HMRC actively investigates arrangements that claim to sidestep the rules, and contractors, not just promoters, can be pursued.
• Keep records (contracts, SDSs, and correspondence about working practices) in case a determination is ever queried.

The bottom line

IR35 isn't going away, and the 2026 threshold changes mean some businesses will move in and out of scope over the next two tax years rather than facing a one-off change. Whether you're building a contractor workforce or working as one, the safest position is the same: individual, evidenced, regularly reviewed assessments, not assumptions.

If you're hiring contract talent and want engagements structured correctly from day one, Verso's recruitment specialists can help you navigate IR35-compliant contractor placements.