Introduction
On 6 April 2026, the small-company thresholds for the off-payroll working rules moved up. A business now counts as "small" if it meets two of three tests: turnover of £15m or less, a balance sheet total of £7.5m or less, and 50 or fewer employees. Meet the definition and the off-payroll working responsibility sits back with the contractor's personal service company, not with you.
If you run finance at a business that has just crossed under the new line, the temptation is obvious. File the change, take the cost saving, move on. That reading is too clean. Exemption is a tax status. It isn't a licence to stop looking. This piece covers what the IR35 small company threshold 2026 change actually does, what it leaves untouched, and how to use the first 90 days well.
What has changed, and who is now exempt
The three tests are familiar from the Companies Act definition of a small company. HMRC is simply aligning the off-payroll regime with it. Before 6 April, the thresholds were lower, which meant more mid-market businesses sat inside the rules and carried the determination burden for every contractor engaged through a PSC.
Under the new thresholds, a company that meets two of the three tests for two consecutive financial years is treated as small for off-payroll purposes. When a business qualifies, the responsibility for assessing whether a contractor is inside or outside IR35 shifts back to the contractor's PSC. The end client stops issuing Status Determination Statements, stops running CEST assessments for PSC engagements, and stops operating PAYE on deemed payments.
For some mid-market groups this is a genuine change in posture. A finance team that has been drafting SDSs and handling contractor disputes for four years no longer has to. Payroll systems can be simplified. External advisory fees tied to assessments can be trimmed.
The catch sits in the word "exempt." Exemption is narrow. It applies to the off-payroll working rules specifically. It does not rewrite your wider workforce obligations, and it does not reach every worker in your supply chain.
What exemption transfers, and what it doesn't
Here is the part worth underlining for the board.
What does transfer. IR35 decision-making for PSC contractors moves back to the contractor. If HMRC later argues a contractor was inside the rules, the liability chain starts with the PSC, not with you. That is a real reduction in direct tax exposure.
What does not transfer. A lot.
Live contracts written under the old regime are still running. If you issued an SDS in December 2025 for a contract that runs into late 2026, the determination you made remains relevant to the period before exemption. Warranties and indemnities you gave in supplier contracts or professional services agreements don't disappear because your company grew smaller on paper. Read the clauses before you assume they lapse.
The umbrella joint and several liability regime is separate. It came in to tackle payroll fraud in umbrella chains and applies whether you are small, medium or large. If you use umbrella companies anywhere in your contractor supply chain, your exposure there is unchanged.
The Fair Work Agency's remit is wider than tax. It covers holiday pay, minimum wage, modern slavery indicators and agency worker rights. It does not stop at the edge of the IR35 rules, and it does not care about your balance sheet. A newly-small company with a messy contractor book is as visible to the FWA as a £200m one.
Reputational risk sits outside the tax code entirely. If a contractor raises an employment tribunal claim arguing they were a worker in all but name, or a newspaper runs a piece on your use of long-tenure PSC contractors, "we were exempt" is a weak first line of defence. Clients, investors and your own people will judge the substance, not the status.
Then there is the quiet issue most finance teams underestimate: contractor creep. The rules shifting off your plate often means less scrutiny internally. Less scrutiny means tenure drift, role drift, and a workforce that looks less like a bench of specialists and more like a shadow headcount. The day you hit the thresholds again, or the day an auditor asks, that shadow workforce is a problem you have been quietly building for eighteen months.
The first 90 days: a practical checklist
Use the window. The point of the first quarter post-exemption is not to stand down your controls. It is to reshape them for a world where you are not running formal assessments but still need to know who is working for you.
- Map every live PSC engagement. Log contract start date, original SDS status, extension history and current day rate. You want a single view, not a scatter of HR records and procurement spreadsheets.
- Check your contract clauses. Warranties, indemnities, audit rights and termination terms written under the old regime don't automatically release. Flag anything that obliges you to continue making determinations or sharing SDSs with the chain.
- Separate PSC, umbrella and agency routes. Umbrella JSL still applies. You need to know which route each contractor sits in, and who the fee-payer is.
- Review tenure. Long-tenure contractors were your highest-risk population under the old rules. They are still your highest-risk population under employment law, IR35 reinstatement risk, and board-level optics.
- Document the transition. Write down, on one page, the date you became small, the basis (which two of three tests), and what you changed operationally. If you grow back over the line in two years, this is your audit trail.
- Decide what to tell line managers. The worst outcome is a procurement team that hears "IR35 is off" and starts waving through long engagements. Replace the old SDS control with a lighter internal standard: engagement length caps, role definitions, and sign-off above a threshold.
- Brief the audit committee. Off-payroll working exemption reduces one line of exposure. It does not reduce your overall workforce risk posture. The board needs to see both.
A short board briefing can land this in a single slide. Something like: we are exempt from off-payroll for the 2026/27 year. Direct IR35 liability for new PSC engagements sits with the contractor. Umbrella, Fair Work Agency, employment status and reputational exposure are unchanged. We are reshaping internal controls from assessment to visibility, and we will review again at year-end.
Key Takeaways
- Exemption under the IR35 small company threshold 2026 is a tax status. It isn't a blanket release from workforce risk.
- Umbrella joint and several liability, Fair Work Agency scrutiny, live contract warranties and reputational exposure all survive the threshold change.
- Long-tenure and role-drift risks tend to grow quietly in businesses that step out of formal assessments. Build visibility in before the drift starts.
- Use the first 90 days to map the contractor estate, review contract clauses, and brief the audit committee on what has changed and what has not.
What This Means for Your Organisation
Whether you're newly exempt or still under the rules, the foundation is the same: know who is working for your organisation. Exemption is a tax status. Visibility is a business capability.
If your finance team has just crossed under the new thresholds and wants a view of contractor exposure before the next board meeting, CoComply can help surface hidden headcount across your supply chain and show where the governance gaps sit.
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