IR35 and Limited Companies

Roughly 14,000 UK businesses are on track to become exempt from operating IR35 without changing a single thing about how they actually work with their contractors — purely because a size threshold moved. It's a genuinely significant shift, and I've already had contractor clients ring us up convinced it means an immediate change to their own tax position. It doesn't, not yet, and the gap between what's actually happened and what people assume has happened is exactly the kind of thing that catches contractors out.

IR35 has a reputation for being confusing, and honestly, it's earned that reputation fairly. The rules have changed more than once in the last decade, the terminology shifts depending on which piece of legislation you're reading, and a lot of contractor folklore circulating online is either outdated or was never quite right in the first place. This guide sets out where things genuinely stand for 2026/27, including the threshold change everyone's talking about, and what it actually means for your own limited company.

What Is IR35?

The Original Purpose — Disguised Employment

IR35 exists to catch a specific situation: someone working through their own limited company, but in every practical sense functioning as an employee of the client they're working for, without the National Insurance and tax an employee would normally have deducted. The rules are designed to tax that arrangement roughly as if it were employment, closing the gap that would otherwise exist between a genuine contractor and someone effectively disguising employment behind a company structure.

Chapter 8 vs Chapter 10 — Two Different Rulebooks

This is where a lot of the confusion genuinely comes from. Under the original rules — Chapter 8 of the relevant tax legislation — the contractor's own company assessed its own status and dealt with any resulting tax itself. Since the 2021 private sector reforms — Chapter 10 — medium and large clients took over that responsibility for most engagements, leaving only smaller clients still operating under the older, self-assessed Chapter 8 approach. Both rulebooks are still very much in force today; which one applies to you depends entirely on the size of your end client.

Why It Still Generates So Much Confusion

Genuine rule changes, outdated contractor-forum advice, and a steady stream of "IR35 is basically over now" claims all compete for attention online, and very little of it is reliably accurate for your specific situation. The safest approach, every time, is checking your actual position rather than relying on something you read that may well have applied to a different client, a different year, or rules that have since moved on.

Does IR35 Apply to My Limited Company?

The Key Employment Status Tests

Status hinges on a handful of core factors, weighed together rather than any single one in isolation: control (how much say the client has over how, when and where you work), substitution (whether you have a genuine, unfettered right to send someone else to do the work instead of you), and mutuality of obligation (whether the client is obliged to keep offering work, and you're obliged to accept it). Genuine contractors typically score clearly on the "outside" side of all three; disguised employees typically don't.

Contract Terms vs Working Practice

A contract that reads beautifully — clear substitution clause, no mutuality of obligation, minimal control — still isn't enough on its own. What actually happens day to day matters just as much, arguably more. I've reviewed contracts that looked textbook-perfect on paper, describing a genuinely independent contractor relationship, sitting alongside a working reality where the contractor attended the same daily stand-up as employees, used a company email address, and had no realistic ability to send a substitute. HMRC looks at both, and where they diverge, the actual working practice generally wins.

Why the Paperwork Alone Isn't Enough

This is worth saying plainly, because it's the single most common misunderstanding I come across: a well-drafted contract reduces risk, but it doesn't guarantee an outside-IR35 outcome if the reality of the engagement contradicts it. Genuine status comes from how the work actually happens, not just from what's written down.

How Does IR35 Affect Salary and Dividends?

What Happens If a Contract Is "Inside IR35"

If an engagement is determined to be inside IR35, the income from that specific contract is broadly taxed as if it were employment income, largely before it ever reaches your company's own accounts as ordinary trading profit — the tax efficiency of taking it as dividends is, in effect, closed off for that particular contract's earnings.

The Deemed Employment Payment

Where the client or agency is responsible for the determination and PAYE, they deduct tax and National Insurance from the payment before it reaches your company, broadly as if you were an employee of the client. Where your own company is responsible (a genuinely smaller client, under Chapter 8), your company itself calculates a "deemed employment payment" and accounts for the tax and NI due, with a specific deduction allowed for certain expenses along the way.

Working Outside IR35 – What Changes

For an engagement genuinely outside IR35, your company continues to operate normally — invoicing the client, receiving payment gross, and you as the director choosing your own salary and dividend split exactly as covered in our guide to how directors should pay themselves. The whole point of getting the status assessment right is protecting access to that normal, more tax-efficient structure for genuinely independent contract work.

Who Decides IR35 Status?

Medium and Large Private Sector Clients

For engagements with medium and large private sector clients, and for all public sector engagements, the client is legally responsible for determining your status and must issue a Status Determination Statement — a formal document setting out their conclusion and the reasoning behind it, sent to both you and any agency in the payment chain.

Small Companies – Responsibility Reverts to You

If your end client qualifies as a small company, responsibility reverts entirely to your own limited company, under the original Chapter 8 rules — you assess your own status, and you bear the consequences if HMRC later disagrees.

The 2026 Threshold Change – What's Actually Changing

From 6 April 2026, two of the three statutory thresholds that define a "small" company for these purposes increased significantly: the turnover threshold rose from £10.2 million to £15 million, and the balance sheet threshold rose from £5.1 million to £7.5 million, with the employee threshold staying at 50. A company only needs to meet two of the three to qualify as small. HMRC estimates around 14,000 companies currently sitting in the medium category will move into the small, exempt category as a result.

Why the Practical Impact Is Delayed to 2027

Here's the detail that's already causing genuine confusion, and it's important to get right: this change doesn't flip client responsibility over the moment the new thresholds took effect. Company size for these purposes is assessed against a company's previous financial year's accounts, and a company generally needs to meet the new thresholds for two consecutive financial years before its status actually changes. In practice, this means most affected clients won't see the practical shift in IR35 responsibility until April 2027 at the earliest, even though the threshold numbers themselves changed in April 2026. I'd strongly caution against any contractor assuming a client's IR35 responsibility has already shifted purely because that client's turnover now sits under £15 million — check the actual, current Status Determination Statement position with the client directly, not the headline threshold figures alone.

The Status Determination Statement and Your Right to Challenge It

If a medium or large client issues an SDS you disagree with, you have the right to challenge it through the client's own status disagreement process, and they're obliged to respond within a set timeframe. If a client fails to issue a valid SDS at all where they were required to, responsibility and liability for the tax can default to them rather than you or the fee-payer further down the chain — worth knowing if you're ever left without a clear determination on a contract that should have had one.

IR35 for Contractors Working Through Their Own Company

Getting a Proper Status Assessment

Whether responsibility for the determination sits with your client or with you, the underlying question is the same, and it's worth getting a proper, evidence-based assessment rather than relying on a generic online checker taken in isolation. The genuine facts of how you work — not just the contract wording — need to be honestly reflected in the assessment for it to hold up under scrutiny.

Contract-by-Contract, Not Once and Forget

Status isn't a one-time badge that follows you from client to client. Every engagement needs its own assessment, because the working practices, level of control, and substitution rights can differ meaningfully even between two contracts that look superficially similar on paper.

What Happens If HMRC Disagrees Later

If HMRC later concludes a contract you treated as outside IR35 should genuinely have been inside, the financial consequences — back tax, National Insurance, penalties and interest — can be significant, and they land on whichever party held responsibility for the determination at the time. This is exactly why the assessment needs to happen properly at the start of an engagement, with the reasoning kept on file, rather than assumed and forgotten about.

Practical Steps to Protect Yourself

Keep a written record of why each contract sits where it does — the substitution rights, the actual level of control, the absence (or presence) of mutuality of obligation. Review status again if a contract's working pattern genuinely changes partway through. And where a client's SDS looks questionable or inconsistent with how you actually work, use the formal challenge process rather than simply accepting it or ignoring it. None of this eliminates risk entirely, but it puts you in a considerably stronger position if your status is ever questioned.

IR35 rewards contractors who treat status as an ongoing discipline, not a box ticked once and forgotten. With the small company thresholds shifting and the practical effects landing gradually over the next year or so, this is exactly the kind of area worth a proper conversation rather than a guess based on something you read online. If you'd like your current contracts reviewed, or want to understand where a specific client's size genuinely leaves you for 2026/27, get in touch with the team at Cannon Accountants.

For the wider picture of how IR35 sits alongside salary, dividends and everything else covered in this series, head back to our complete Limited Company Tax Guide 2026/27: Corporation Tax, Dividends & Director Tax →.

Disclaimer:

The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.