IR35 for Small Business Owners
If you run a small business and hire freelancers or contractors, you’ve probably heard the term IR35. But what does it actually mean for you? To help you understand how IR35 can impact your business, we’ve put together this guide for you.
What is IR35?
IR35 is a piece of UK tax legislation designed to prevent tax avoidance. It targets situations where a worker provides services through their own limited company (often called a Personal Services Company or PSC) but in practice operates just like an employee.
So if, in theory, a contractor would be an employee, if there were no intermediary company in between, they should broadly pay the same Income Tax and National Insurance as any employee would.
Inside vs Outside IR35
Two key terms you’ll hear are “inside IR35” and “outside IR35”. But what do they actually mean?
- Inside IR35 . This means that the contractor is treated as an employee for tax purposes. Income Tax and National Insurance must be deducted from their fees.
- Outside IR35 . This is where the contractor is considered genuinely self-employed, can be paid through their limited company, and manages their own tax affairs.
How is inside vs outside IR35 determined?
There are three main factors that determine which category applies:
- Control. Does the contractor decide how, when, and where they work?
- Substitution. Can they send someone else to do the job in their place?
- Mutuality of obligation. Is either party obligated to offer or accept future work?
Does IR35 apply to small businesses?
The good news for most small business owners is that small companies are exempt from having to determine a contractor’s IR35 status with that responsibility instead falling on the contractor themselves.
To qualify as a “small company” for IR35 purposes, your business must meet at least two out of these three criteria:
- Annual turnover of no more than £15 million.
- Balance sheet total of no more than £7.5 million.
- No more than 50 employees.
These thresholds increased from April 2025 (up from £10.2m turnover and £5.1m balance sheet), meaning around 14,000 more businesses now fall into the small company category and are exempt from the off-payroll rules.
If you’re a genuinely small business, a sole trader, a micro-business, or a growing SME, it’s very likely that, under these rules, you are not accountable for determining if a contractor falls under IR35.
How does IR35 apply to medium and large businesses?
It is worth planning for your business scaling as, if it grows beyond the small company thresholds, the rules change and you become responsible for:
- Assessing whether each contractor falls inside or outside IR35.
- Issuing a Status Determination Statement (SDS) to the contractor.
- Deducting the correct tax and National Insurance if the contractor is inside IR35.
How can Short Accounting help?
IR35 can feel complicated, but for most small businesses, the rules are more straightforward than they first appear. Whether you’re unsure if your business qualifies as “small” under IR35, need help reviewing your contractor arrangements, or want to make sure you’re fully compliant as you grow, we’re here to help. Simply get in touch and we’ll see how we can help.
Adam is our managing director and a fully AAT-certified accountant. Adam founded Short Accounting in 2014 with the aim of helping business owners with their accounting and tax needs so that they can focus on growing and managing their businesses.
Over the years Adam has helped thousands of SMEs, sole traders, limited companies and more with the full range of accounting services. He’s a firm proponent of adopting the latest in accounting tech to help streamline processes to ensure that all of our clients get the best service possible.
