{"id":17851,"date":"2026-05-14T16:36:20","date_gmt":"2026-05-14T11:06:20","guid":{"rendered":"https:\/\/befreeltd.com\/uk\/?p=17851"},"modified":"2026-09-03T10:28:33","modified_gmt":"2026-09-03T04:58:33","slug":"ir35-reclassification-accounting-firms-guide","status":"publish","type":"post","link":"https:\/\/befreeltd.com\/uk\/resources\/blogs\/ir35-reclassification-accounting-firms-guide\/","title":{"rendered":"IR35 Reclassification 2026: How Accounting Firms Should Advise Newly Affected Clients"},"content":{"rendered":"\t\t
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From 6 April 2026, the size thresholds that determine whether a business qualifies as ‘small’ for IR35 purposes have increased significantly. The annual turnover threshold rose from \u00a310.2 million to \u00a315 million, and the balance sheet total from \u00a35.1 million to \u00a37.5 million. HMRC estimates that approximately 14,000 businesses will be reclassified as ‘small’ as a direct result.<\/p>

For accounting practices, this is not a background regulatory update. It is a change that directly affects which of your clients are responsible for IR35 determinations on contractor engagements, and which clients need to take specific action in the coming weeks. Your practice is often the first point of contact when business owners need to understand what has changed and what to do.<\/p>

This guide covers what changed, how to identify affected clients, and what practical advice your practice needs to deliver immediately.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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What the IR35 Threshold Change Actually Means\n<\/h2>\t\t\t\t<\/div>\n\t\t\t\t
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Under the off-payroll working rules that came into the private sector in April 2021, the responsibility for determining a contractor’s IR35 status sits with the end client for medium and large companies. Small companies are exempt; when a client qualifies as small, the contractor’s own Personal Service Company (PSC) determines its own IR35 status and accounts for any tax due.<\/p>

The definition of ‘small’ requires a business to meet two out of three criteria for two consecutive financial years. From April 2026, those criteria look like this:<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

\n\t\t\t\t\t\t\t\t\t\n\n\n\n\n\n
Size criterion<\/strong><\/td>\nOld threshold<\/strong><\/td>\nNew threshold (Apr 2026)<\/strong><\/td>\nChange<\/strong><\/td>\n<\/tr>\n
Annual turnover<\/td>\nUp to \u00a310.2m<\/td>\nUp to \u00a315m<\/td>\n\u2191 \u00a34.8m<\/td>\n<\/tr>\n
Balance sheet total<\/td>\nUp to \u00a35.1m<\/td>\nUp to \u00a37.5m<\/td>\n\u2191 \u00a32.4m<\/td>\n<\/tr>\n
No. of employees<\/td>\n50 or fewer<\/td>\n50 or fewer<\/td>\nUnchanged<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t
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For practices that specialise in\u00a0outsourcing for accountants<\/a>, particularly those serving contractor-heavy clients in professional services, IT, and engineering, this change requires proactive review across the client book, not a reactive wait for clients to ask.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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How to Identify Which Clients are Affected<\/h2>\t\t\t\t<\/div>\n\t\t\t\t
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Not every client will benefit from the reclassification. The analysis is more nuanced than checking whether turnover is below \u00a315 million:<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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Client profile<\/strong><\/td>\nPrevious classification<\/strong><\/td>\nApril 2026 status<\/strong><\/td>\nIR35 impact<\/strong><\/td>\n<\/tr>\n
Turnover \u00a310m\u2013\u00a315m<\/td>\nMedium \/ Large<\/td>\nNewly small<\/td>\nIR35 liability reverts to contractor PSC<\/td>\n<\/tr>\n
Turnover \u00a37m\u2013\u00a310m<\/td>\nMedium<\/td>\nRemains medium<\/td>\nNo change, client still determines IR35<\/td>\n<\/tr>\n
Balance sheet \u00a35.1m\u2013\u00a37.5m<\/td>\nPreviously Med<\/td>\nMaybe small<\/td>\nMust meet two out of three criteria, check all criteria<\/td>\n<\/tr>\n
Client in a group structure<\/td>\nVaries<\/td>\nCheck carefully<\/td>\nGroup aggregation rules apply, but may not benefit<\/td>\n<\/tr>\n
Turnover under \u00a35m<\/td>\nSmall<\/td>\nRemains small<\/td>\nNo change, the contractor’s PSC is always responsible<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t
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What the Rate Change Means in Practice: Three Director Scenarios\n<\/h2>\t\t\t\t<\/div>\n\t\t\t\t
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The table below shows the direct impact across common director remuneration scenarios. These are illustrative figures based on standard rates and do not account for individual circumstances.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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Director scenario<\/strong><\/p><\/td>

Tax 2025\/26<\/strong><\/p><\/td>

Tax 2026\/27<\/strong><\/p><\/td>

Additional cost<\/strong><\/p><\/td><\/tr>

Basic rate director , \u00a330,000 dividend<\/p><\/td>

\u00a32,625<\/p><\/td>

\u00a33,225<\/p><\/td>

Extra \u00a3600\/yr<\/p><\/td><\/tr>

Higher rate director , \u00a360,000 dividend<\/p><\/td>

\u00a319,350<\/p><\/td>

\u00a320,550<\/p><\/td>

Extra \u00a31,200\/yr<\/p><\/td><\/tr>

Higher rate director , \u00a380,000 dividend<\/p><\/td>

\u00a326,100<\/p><\/td>

\u00a327,700<\/p><\/td>

Extra \u00a31,600\/yr<\/p><\/td><\/tr>

Additional rate , \u00a3100,000 dividend<\/p><\/td>

\u00a338,100<\/p><\/td>

\u00a338,100<\/p><\/td>

No change<\/p><\/td><\/tr><\/tbody><\/table>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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Illustrative guide only. Individual client positions depend on financial year-end dates, group structure, and two-year test results.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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The two-year timing rule is the detail most practices miss<\/h3>\t\t\t\t<\/div>\n\t\t\t\t
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Reclassification is not automatic from 6 April 2026. A business must meet the new size thresholds in two consecutive financial years ending before the relevant tax year. For most businesses, the practical effect of the new thresholds will not apply until April 2027 at the earliest, based on their 2024\/25 and 2025\/26 accounts. Businesses with earlier year-ends may qualify sooner. This makes careful, client-specific analysis essential before advising.<\/p>

The group structure issue also requires attention. Where a client is part of a larger group, the small company exemption applies to the whole group, not just the individual entity. A subsidiary with a \u00a312 million turnover that is part of a \u00a3200 million group does not qualify as small, regardless of what the new thresholds say at the entity level.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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IR35 Small Company Exemption: What Newly Small Clients Need to Do \n<\/h2>\t\t\t\t<\/div>\n\t\t\t\t
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Stop Issuing Status Determination Statements for New Engagements<\/h3>\t\t\t\t<\/div>\n\t\t\t\t
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Once a client qualifies as small, it is no longer required to issue SDSs to contractors. The responsibility moves to the contractor’s PSC. Existing SDSs already issued remain valid for the engagements they cover; clients should not retroactively withdraw or amend them. The change applies to new engagements and renewals from the date the small classification takes effect.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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Notify Contractors that the Responsibility has Shifted\n<\/h3>\t\t\t\t<\/div>\n\t\t\t\t
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Contractors engaged through PSCs need to know that IR35 determination is now their responsibility. This is critical where a contractor has been relying on an inside-IR35 SDS as the basis for PAYE being operated by the client. If that changes, the contractor needs to reassess their own status and account for tax correctly. Your client should communicate this in writing to all affected contractor engagements.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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Review Contractor Contracts for Outdated IR35 Language\n<\/h3>\t\t\t\t<\/div>\n\t\t\t\t
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Many contracts contain clauses written for medium or large company engagements, obligations to issue SDSs, manage status disputes, and operate PAYE. Once the client is reclassified as small, these clauses become inaccurate. New and renewed contracts should reflect the small company position. Practices that advise clients to outsource payroll<\/a>\u00a0can streamline this transition considerably. Specialist payroll teams understand both the contractual and HMRC reporting implications of the reclassification.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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Advice on the Risks that do not Disappear With Reclassification<\/h3>\t\t\t\t<\/div>\n\t\t\t\t
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Being classified as small removes the obligation to determine IR35 status, but it does not eliminate all risk. If a contractor incorrectly self-assesses as outside IR35 and HMRC challenges that, the liability falls on the PSC. Where there is evidence that a client knowingly facilitated incorrect status assessments, HMRC retains the ability to investigate and pursue the client as well. The transition to a small status is not a reason to become less rigorous about contractor working arrangements.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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IR35 Reclassification Checklist for Accounting Practices <\/h2>\t\t\t\t<\/div>\n\t\t\t\t
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The following summarises the key actions your practice should take or recommend for clients who may be affected:<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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Action<\/strong><\/p><\/td>

Detail<\/strong><\/p><\/td><\/tr>

Check if the client qualifies as ‘small’ under the new thresholds<\/p><\/td>

Apply the two-of-three test: turnover, balance sheet, and employees<\/p><\/td><\/tr>

Apply the two-year rule correctly<\/p><\/td>

Two consecutive financial years ending before the tax year<\/p><\/td><\/tr>

Identify all contractor engagements at the client<\/p><\/td>

Map PSC contractors; review existing SDS documentation<\/p><\/td><\/tr>

Communicate the change to client HR and legal teams<\/p><\/td>

Newly small clients may need to update contractor contracts<\/p><\/td><\/tr>

Advise contractors that the responsibility has shifted<\/p><\/td>

Contractors must now self-assess their own IR35 status<\/p><\/td><\/tr>

Review the group structure before applying the exemption<\/p><\/td>

Aggregate group size may prevent the exemption from applying<\/p><\/td><\/tr>

Document your advice and the client’s position clearly<\/p><\/td>

HMRC may query the basis for any reclassification<\/p><\/td><\/tr>

Flag threshold-adjacent clients for annual monitoring<\/p><\/td>

Clients near \u00a315m may move in\/out of small status annually<\/p><\/td><\/tr><\/tbody><\/table>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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For clients who have been operating inside-IR35 PAYE for contractors and are now reclassified as small, the payroll function needs updating. If your practice manages payroll for those clients, this is the moment to review those arrangements.\u00a0Outsourced payroll services<\/a>\u00a0that already handle RTI submissions and contractor payment structures can manage this transition cleanly, removing affected contractor records, ensuring HMRC reporting reflects the new position, and keeping the client’s payroll compliant through the change.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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Why This is an Advice Opportunity, Not Just a Compliance Update\n<\/h2>\t\t\t\t<\/div>\n\t\t\t\t
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The IR35 threshold change is one of several April 2026 regulatory updates that affect clients across different sectors simultaneously, alongside MTD ITSA, changes to employer NI, mandatory benefits-in-kind payrolling, and HMRC’s withdrawal of the free CT600 tool. Practices managing all of these for large client books are under real delivery pressure.<\/p>

This is exactly where\u00a0accounting outsourcing<\/a>\u00a0as a delivery model earns its value. Practices that have a specialist back-office team handling compliance preparation, IR35 assessments, payroll transitions, MTD filings, and CT returns can focus their senior resource on the advisory conversations with clients that these regulatory changes demand. The capacity to advise well depends on not being consumed by the delivery work behind every piece of advice.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t

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How Befree Supports Accounting Practices Through IR35 Transitions\n<\/h2>\t\t\t\t<\/div>\n\t\t\t\t
\n\t\t\t\t\t\t\t\t\tBefree works with UK accounting practices as a specialist back-office delivery partner, handling payroll preparation, RTI submissions, and contractor payment restructuring for clients going through IR35 reclassification. Where practices are managing multiple April 2026 regulatory changes simultaneously, our teams absorb the preparation and processing work so your senior accountants can stay focused on client advisory.\n\nFor the full HMRC technical guidance on the off-payroll working rules, the small company exemption, and how the two-year test applies, including group aggregation rules, see HMRC’s off-payroll working rules guidance<\/a>.\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t
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The Reclassification Requires Practice Action, Not Just Client Notification\n\n<\/h2>\t\t\t\t<\/div>\n\t\t\t\t
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The April 2026 IR35 threshold change will catch many clients and their accountants off guard. The two-year rule makes the analysis nuanced, the group structure question adds complexity, and the practical steps for newly small clients are not self-evident. Practices that identify affected clients, work through the analysis, and deliver clear, documented advice will be seen as proactive and commercially aware.<\/p>

More broadly, contractor workforce structures need to be reviewed regularly, not just when HMRC changes a threshold. Clients with significant contractor populations are carrying ongoing compliance risk that shifts every time a rule changes, a contractor’s working arrangement changes, or a new HMRC guidance note is published. That is precisely the kind of ongoing risk that accountants are best placed to manage.<\/p>

At Befree, we work with accounting practices to provide the back-office delivery capacity that makes it possible to manage complex client transitions like this, handling the processing and preparation work, so your team stays focused on the advice that actually matters to clients.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t

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Frequently Asked Questions About IR35 Reclassification \n\n<\/h2>\t\t\t\t<\/div>\n\t\t\t\t
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What changed about IR35 from April 2026? <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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From 6 April 2026, IR35 size thresholds increased, meaning more businesses now qualify as \u2018small\u2019 and fall outside the off-payroll working rules. The annual turnover threshold rose from \u00a310.2 million to \u00a315 million, and the balance sheet total from \u00a35.1 million to \u00a37.5 million. The employee count threshold remains at 50 or fewer. Businesses that now qualify as small are exempt from the off-payroll working rules; IR35 determination responsibility reverts to the contractor’s Personal Service Company rather than the end client.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t

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Does the reclassification take effect immediately from 6 April 2026? <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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Not necessarily. The IR35 small company classification applies a two-year test; a business must meet at least two of the three size criteria in two consecutive financial years ending before the relevant tax year. For most businesses, the practical effect of the new thresholds will not apply until April 2027, based on 2024\/25 and 2025\/26 accounts. Businesses with earlier financial year-ends may qualify sooner, which is why client-specific analysis is essential rather than a blanket approach.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t

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Is the small company exemption applicable to enterprises inside a bigger group? <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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No. The IR35 small company exemption applies at the group level, not the individual entity level. If a subsidiary meets the new size thresholds individually but is part of a group that exceeds them in aggregate, the subsidiary does not qualify for the exemption. The group aggregation rules follow the same framework as the Companies Act group accounting requirements. This is one of the most commonly misunderstood aspects of the threshold change and requires careful analysis for clients with group structures.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t

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What should clients do with existing Status Determination Statements when reclassified as small? <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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Existing SDSs issued for ongoing engagements remain valid and should not be retroactively withdrawn. The change in responsibility applies to new engagements and renewals from the date the small classification takes effect. Clients should communicate the change to existing contractors in writing so they understand that future IR35 determinations are their own responsibility, but should not attempt to void or amend SDSs for contracts already properly assessed and documented.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t

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What payroll changes are needed when a client is reclassified from medium to small? <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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Clients who were previously operating inside-IR35 PAYE arrangements for contractors, deducting tax and NI and submitting through RTI, need to update their payroll to reflect the new position. Affected contractor payroll records should be closed or updated from the date the small classification takes effect. RTI submissions must reflect the change accurately. New contractor engagements should be documented correctly from the outset, and the contractors themselves should be notified in writing that the IR35 responsibility has transferred to their PSC.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t\t

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How should practices identify which clients are affected by the April 2026 threshold change? <\/div><\/span>\n\t\t\t\t\t\t\t\n\t\t\t<\/path><\/svg><\/span>\n\t\t\t<\/path><\/svg><\/span>\n\t\t<\/span>\n\n\t\t\t\t\t\t<\/summary>\n\t\t\t\t
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The most efficient approach is to segment the client base by turnover, starting with those in the \u00a38 million to \u00a318 million range, the zone where the new thresholds are most likely to have an effect. For clients in that range, check the balance sheet total and employee count to see whether they meet two of the three size criteria. Apply the two-year test using the relevant financial year-end dates. Clients with group structures require separate analysis using consolidated group figures. Flag clients near the \u00a315 million boundary for ongoing annual monitoring.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/details>\n\t\t\t\t\t<\/div>\n\t\t\t\t\t