Increase to small company threshold for off-payroll working rules

Off-payroll working rules and the small company threshold

The off-payroll working rules, commonly known as IR35, apply when an individual provides services through an intermediary, such as a personal service company (PSC), but would otherwise be considered an employee if engaged directly. These rules ensure that the correct tax and National Insurance contributions are paid.

For private sector entities, the rules only apply if certain "gateway tests" are met, one of which is that the engaging entity is not classified as "small."  The thresholds that apply to this definition are being increased. 

Key changes to the definition of 'small company'

For financial years beginning on or after 6 April 2025, a company will be considered 'small' and therefore outside the scope of the off-payroll working rules if it meets at least two of the following three conditions:

• Its turnover is no more than £15 million (increased from £10.2 million)
• Its balance sheet total is no more than £7.5 million (increased from £5.1 million)
• Its monthly average number of employees is no more than 50 (unchanged).

The same threshold increases will apply to group companies and other entities.

Implications for businesses

This increase in thresholds means that more private sector companies will fall outside the scope of the off-payroll working rules from April 2025. Businesses that were previously required to assess the employment status of contractors may now find themselves exempt, shifting responsibility for compliance back to the contractors themselves via their PSC's.

However, companies approaching these thresholds will still need to monitor their financial position carefully, as exceeding the limits could bring them back within the scope of the rules in future financial years.

Conclusion

The changes to the small company definition provide relief for some businesses, reducing the administrative burden of compliance with off-payroll working rules. With the new thresholds taking effect from April 2025, affected companies should review their contractor engagement policies and financial reporting practices to understand how the changes impact their obligations.

For more information or advice, please contact Ellen Netto in our Employment team on 0117 314 5377, or complete the form below.