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Since it was introduced in April 2000, IR35 has always been an important consideration for contractors operating through a limited company. Also known as the ‘off-payroll working rules’, IR35 is designed to tackle disguised employment and ensure that self-employed people that work as if they were employed pay the correct amount of tax.
There have been various changes to IR35 legislation in 2025 which contractors need to be aware of. Understanding these changes is essential to protect your income, ensure compliance and avoid any penalties.
What is IR35?
IR35 is tax legislation that applies to contractors that operate through their own limited company or via a personal service company (PSC). It assesses the nature of the contract and working arrangements with clients to determine whether contracts are inside or outside IR35.
If HMRC deems a contract to be inside IR35, you’re treated as an employee for tax purposes and will pay income tax and NICs through PAYE. If you’re outside IR35, you’re considered to be genuinely self-employed and have responsibility for managing your own tax affairs.
Being outside IR35 is the ideal scenario for contractors as you have control in terms of how you manage your remuneration and tax affairs. You can maximise tax-efficiency by utilising salary and dividends, allowable expenses can be claimed to lower your taxable profit and pension contributions can be made via your company. There’s also flexibility to strategically control both the timing and amount of your income to facilitate tax planning as well as effective cash flow management.
What Are The Key IR35 Changes In 2025?
1. Small Company Thresholds
Effective from April 2025, there have been changes to the thresholds that define a ‘small company’:
- Annual turnover below £15m (previously £10.2m)
- Balance sheet total below £7.5m (previously £5.1m)
- 50 employees or less
Any company that meets 2 or more of these criteria is defined as small in respect of IR35. Clients classified as small companies don’t have responsibility for determining the IR35 status of a contractor they have engaged. The responsibility is with the contractor or their PSC, so these threshold increases mean that a greater number of contractors, or their PSC’s, have the responsibility for determining their own IR35 status.
2. Double Taxation
Effective from April 2025, HMRC introduced a change to the IR35 rules designed to address the issue of double taxation. Previously, if a client had incorrectly determined that a contractor they were engaging was outside IR35 and HMRC later ruled they were inside, the client could be billed for the full PAYE and NICs owed even if the contractor had already paid tax through their limited company. This rule change means HMRC will offset the tax already paid by the contractor so both parties aren’t taxed twice.
Although this change impacts clients more than contractors, there is still a benefit for contractors as client risk is reduced which improves the chances of contractors landing higher-value outside IR35 contracts.
3. Renewed Enforcement and Guidance
HMRC has updated its IR35 guidance to emphasise the importance of contractors diligently reviewing their working arrangements. With the small company threshold changes, an increased number of contractors, or their PSC’s, have the responsibility for determining their own IR35 status rather than the client, so it’s never been more important to keep abreast of the latest rules and guidance and regularly review your contracts and document your working practices.
Working arrangements that mirror employment can result in PAYE and NICs being applied so it’s vital that contractors take a proactive approach to IR35 to ensure compliance and avoid any penalties.
Understanding the Changes and IR35 Compliance
An incorrect IR35 status determination can result in penalties, backdated NICs and unforeseen tax bills so it’s important to get things right.
IR35 status isn’t solely about contract wording, it’s about the working arrangements and practices that you have with your clients. Factors to consider include:
- The Level of Client Control: If the contractor decides when, how and where the work is completed, this suggests the contract is outside IR35
- Ability to Send a Substitute: If you can send a substitute to complete the work in your place, this points to the contract being outside IR35
- Mutuality of Obligation: If the client is not obliged to provide work and there’s no expectation of further work upon completion of a contract, this indicates the engagement is outside IR35
- Financial Risk: If the contractor bears the financial risk for any mistakes or delays, this points to the contract being outside IR35
- Provision of Equipment: If the contractor supplies their own software, tools or equipment, this suggests outside IR35
On the flipside, if the client has control, carries the financial risk and supplies equipment or software, the arrangement is likely inside IR35 meaning HMRC considers it as employment and the contractor will be treated as an employee for tax purposes.
When looking to remain outside IR35, you should ensure that your working arrangements align with genuine self-employment with your contracts negotiated to ensure you have control and independence in terms of how work is completed.
Keeping detailed records of contracts, correspondence, substitution arrangements, and working arrangements and patterns is essential to support your IR35 status. This evidence not only demonstrates your autonomy and financial responsibility but also provides a clear audit trail to defend your outside IR35 position, helping to prevent HMRC challenges and minimise the likelihood of unexpected tax liabilities.
Free Expert IR35 Assessments from Qdos
IR35 can be both daunting and confusing for the self-employed and an incorrect status determination can be costly which is why a professional IR35 status review can be so beneficial.
Having an expert review your contract and working arrangements gives you a clear and accurate determination of your IR35 status so you have the peace of mind that you’re compliant and paying the correct amount of tax. Knowing that you’re outside IR35 allows you to plan ahead with confidence and optimise your tax position, and this is something we can help with as part of our all-inclusive accountancy service.
An IR35 assessment also provides reassurance for your clients that you’re proactive in respect of your IR35 status, giving them clarity on their tax position. This is especially important with the small business thresholds increasing and an expert status determination protects your clients from potential compliance issues and penalties to help build trust and strengthen your working relationship.
This is why we have partnered with Qdos to provide expert free contract assessments. A Qdos IR35 contract assessment provides an expert overall opinion of your IR35 status based on the written terms and conditions of your contract.
Qdos will point out clauses where HMRC may find issues and provide suggestions for positive changes and improvements which could be made where relevant so you can start your contract on the right footing and have confidence in your position.
Trust Qdos to guide you through the complexities of IR35 with precision and clarity. The usual price is £49 plus VAT. Get in touch with Qdos here for your free IR35 assessment.
