Off payroll working thresholds to change

Recently we reported that audit exemption thresholds would change from April 2025. The reason for this is that government is changing the way it defines small and medium sized businesses. This will also affect some businesses in respect of IR35 off payroll working rules. In this article, we clarify what’s changing and how it could affect your business.

What are the IR35 off payroll working rules?

We’ve already written quite extensively on IR35 off payroll working rules.

IR35 first appeared back in 2000. At the time, government felt that many contractors were using personal service companies to avoid tax. In other words, they were working under the same conditions as normal employees, but using the tax advantages of a company. The off payroll rules were designed to determine whether an individual was a genuine contractor or a ‘disguised’ employee.

Originally, a contractor was responsible for determining their IR35 status. That began to change from 2017. In that year, responsibility in the public sector shifted to the hiring organisation. From 2021, the same shift occurred in the private sector. However, it only applied to medium or large companies. Contractors continue to determine their own IR35 status if their end client is a small company.

What are the changes to company size definitions?

Until April 2025, a company is deemed to be medium sized if it meets at least two of these three criteria:

• Annual turnover of £10.2 million+
• Assets of £5.1 million+
• An average of 50+ employees

However, from April 2025, these criteria change to:

• Annual turnover of £15 million+
• Assets of £7.5 million+
• An average of 50+ employees

It’s estimated that this will mean some 14,000 companies will be reclassified from ‘medium’ to ‘small’.

What do the off payroll working thresholds mean for me?

If you have a business that is recategorized as ‘small’, responsibility for determining IR35 status passes to any contractors. However, you need to remember that, for off payroll working, your company size is determined by reference to the previous financial year. So, if you are considered a medium-sized business for the 2024-2025 tax year, that won’t change for the 2025-2026 tax year. The earliest that IR35 rules could pass back to contractors is April 2026.

Similarly, if you are a contractor, you need to be aware of what to do if a client becomes reclassified as a small company. In these instances, you’ll need to take responsibility for defining your own IR35 off payroll working status.

Where can I find out more about the off payroll working rules?

If you want to learn more about the off payroll working rules, HMRC offers detailed guidance here. If you are a THP client, your account manager will be happy to have any questions you might have.

Need more help?

If you need more help, we may be able to assist you. For example, if you need to move contractors to your payroll, you may find it helpful to use our payroll outsourcing services. If you do, we will help you make sure you comply with all relevant HMRC rules and regulations. If you are a genuine contractor, we may be able to help you with our company formation service.