IR35 Rules in 2025: What Contractors and Businesses Need to Know

Since its launch in 2000, IR35 (the UK’s off-payroll working rules) has aimed to stop what HMRC calls “disguised employment” — where someone works like an employee but bills through a personal service company (PSC) to avoid tax.

Fast forward to 2025, and the rules are evolving again. From April, new company size thresholds will impact who determines IR35 status — a shift that could affect thousands of contractors and clients across the UK.

What Is IR35?

IR35 is legislation that ensures contractors working like employees are taxed similarly to employees — even if they invoice through a limited company.

If a contract falls inside IR35, the contractor must pay Income Tax and National Insurance as if they were on payroll. If the contract is outside IR35, they can continue to pay themselves through dividends and salary in the usual way.

Key Changes to IR35 Since 2000

• 2000 – IR35 introduced. Contractors were responsible for assessing their own status.
• 2017 – Public sector reform: clients (not contractors) became responsible for IR35 decisions.
• 2021 – Same change rolled out to medium and large private sector businesses.
• April 2025 – Company size thresholds are increasing, meaning more businesses will qualify as ‘small’, shifting IR35 responsibility back to contractors.

Who Decides IR35 Status?

• Medium & Large Companies: Must assess the contractor’s IR35 status. If inside, they must deduct PAYE tax and NICs.
• Small Companies: The contractor remains responsible for deciding if IR35 applies and paying tax accordingly.
• Public Sector: Always responsible for IR35 status, regardless of size.
• Groups: If a small subsidiary is owned by a medium or large parent company, IR35 rules apply as though the whole group is large.

What’s Changing in April 2025?

From 6 April 2025, the financial thresholds defining a “small” company are increasing:

CriteriaCurrentFrom April 2025Turnover£10.2 million£15 millionBalance Sheet Total£5.1 million£7.5 millionEmployees5050 (unchanged)

To qualify as small, a company must meet at least 2 out of 3.

Impact: Some businesses previously classed as medium may now fall under the "small" category — shifting the IR35 responsibility back to the contractor.

How Does HMRC Assess IR35?

Contracts alone aren’t enough. HMRC looks at working practices and applies several tests:

• Control – Who decides how, when, and where the work is done?
• Substitution – Can the contractor send a replacement?
• Mutuality of Obligation (MoO) – Is there a guaranteed ongoing obligation to offer and accept work?
• Financial Risk – Does the contractor bear any risk (e.g. fixed fees, covering their own mistakes)?
• Integration – Are they part of the team or working independently?
• Payment Structure – Are they paid per project or on a fixed monthly basis?
• Multiple Clients – Working for several clients often suggests self-employment.

HMRC considers the whole picture, not just one factor.

The CEST Tool – Helpful or Flawed?

HMRC’s Check Employment Status for Tax (CEST) tool is designed to help determine status, but it’s not always reliable. It tends to underweight key factors like Mutuality of Obligation and is often too binary in its approach.

Use CEST as a starting point, but don’t rely on it alone — especially for high-value or long-term contracts.

Tax Consequences of Being Inside IR35

If caught inside IR35:

• PAYE tax and NICs must be paid on most of your income.
• You can’t use the same range of business expenses.
• You’ll pay more tax and take home less.
• If the client is medium or large, they deduct the tax for you.
• If the client is small, you must handle the tax yourself.

What If HMRC Investigates?

An IR35 investigation may be triggered by:

• Inconsistencies in tax returns
• Random compliance checks
• Third-party tip-offs

HMRC will review contracts, ask for records, and examine the day-to-day relationship between you and the client.

If you disagree with HMRC’s outcome, you can appeal — but it’s easier to stay compliant from the start with proper documentation and advice.

What Should Businesses Do Now?

With the April 2025 rule change:

• Review your company’s size based on the new thresholds.
• If now classed as small, IR35 responsibility shifts to the contractor.
• If still medium or large, continue assessing IR35 status and deducting tax where needed.
• Review group structures — small subsidiaries of large groups still count as large.
• Make sure your onboarding, contracts, and payroll systems are IR35-compliant.

Best Practices for Contractors and Businesses

✔️ Use tailored contracts that reflect actual working conditions
✔️ Maintain written records of IR35 assessments
✔️ Don’t rely solely on CEST — seek professional advice
✔️ Keep documentation organised in case of an HMRC enquiry

At SBX Accountants, we help both contractors and businesses understand their IR35 obligations, reduce compliance risks, and prepare for possible HMRC scrutiny.

Is IR35 Going Away?

Despite criticism from contractors, IR35 is still in force and likely to stay. The government has defended the rules as essential for fair taxation.

Future tweaks may come — especially around the CEST tool or employment tests — but a full repeal is unlikely in the near term.

Frequently Asked Questions

What’s changing in April 2025?
The size thresholds for small companies are increasing, meaning more businesses will shift IR35 responsibility back to the contractor.

Who decides IR35 status?

• Medium & large clients: the client decides
• Small clients: the contractor decides

What are the new company thresholds?

• Turnover: up to £15 million
• Balance sheet: up to £7.5 million
• Staff: 50 or fewer

Can I challenge HMRC’s IR35 decision?
Yes. You can appeal through HMRC or the tax tribunal.

Is CEST reliable?
It’s a useful tool, but doesn’t cover all key factors. Use it alongside professional advice.

Need Help Navigating IR35?

Whether you're a contractor reassessing your IR35 position or a business adjusting to the 2025 rule change, the team at SBX Accountants is here to help.

✅ Contract reviews
✅ Status assessments
✅ HMRC enquiry support
✅ Full compliance guidance for both sides of the engagement

We have another dedicated IR35 page with further information if you would like to learn more.

📩 Get in touch with SBX Accountants today for tailored IR35 support that protects your business and your bottom line.