April 2025 – Changes to small company classification thresholds came into effect this month that will fundamentally alter IR35 responsibilities for thousands of UK contractors. Around 14,000 medium-sized businesses are expected to be reclassified as small companies, shifting who determines IR35 status for the first time since the off-payroll working rules were introduced in April 2021.
What's Changed
From April 2025, the financial criteria for small company classification have increased substantially. Companies now qualify as small if they meet two of these three tests:
- Annual turnover under £15 million (previously £10.2 million)
- Balance sheet total under £7.5 million (previously £5.1 million)
- Fewer than 50 employees (unchanged)
The turnover threshold has risen by nearly 50%, whilst the balance sheet threshold has increased by 47%. This brings thousands of previously medium-sized businesses into the small company category.
Why It Matters for Contractors
Under the off-payroll working rules, medium and large companies must determine contractor IR35 status themselves. They assess working arrangements, issue Status Determination Statements, and carry the liability if they get it wrong.
Small companies are exempt from all this. When you work for a small company, you determine your own IR35 status. The client doesn't assess you, doesn't issue determinations, and doesn't carry liability.
With thousands of businesses moving from medium to small classification, IR35 responsibility is shifting from clients back to contractors. Many contractors haven't personally assessed their own status since before April 2021. Those skills have gone rusty, and they're about to become necessary again.
The Two-Year Wait
This won't happen immediately. HMRC's two-year rule means companies must meet the new size criteria for two consecutive financial years before being classified as small for IR35 purposes.
A business reclassified as small in April 2025 must continue operating full IR35 procedures until April 2027 at the earliest. That means two more years of status assessments, Status Determination Statements, and all the administrative burden that comes with the off-payroll rules.
Only after meeting the new thresholds for two consecutive years can they stop.
What Changes in 2027
When April 2027 arrives, the contractor market will look different. More businesses will qualify for small company exemption, which means more contractors taking back responsibility for their own status assessments.
This creates opportunities. Contractors can expect more genuine outside IR35 roles as blanket inside determinations from cautious clients become less common. Businesses freed from off-payroll obligations may be more willing to engage limited company contractors. The market should become more flexible.
But there are challenges too. HMRC scrutiny will shift from clients to contractors. Disputes about status will sit with contractors and HMRC directly, not with the client as an intermediary. Contractors will need proper contracts, solid evidence of working practices, and probably professional advice to get their status assessments right.
What Contractors Should Do Now
The two-year window before these changes take full effect is preparation time. Contractors currently working with businesses near the threshold boundaries should start getting ready.
That means understanding how to assess your own IR35 status properly. Reviewing your contracts and working practices. Keeping detailed records that demonstrate genuine self-employment. Building relationships with specialists who can help when client-led assessments stop.
Many contractors have become comfortable with clients handling IR35 assessments since 2021. That comfort won't last. By April 2027, thousands will need to manage their own status again. Starting that preparation now means you're not scrambling when the transition happens.
The changes represent the most significant shift in corporate classification in years. For contractors, the practical impact begins in 2027, but the time to prepare is now.
