IR35 in 2025 – How It Affects Contractors and Businesses

Introduced by the HMRC in 2000 to crack down on disguised employment, IR35 has always been a source of confusion. Now, with recent changes in the autumn budget 2024 and some key changes that will come into force this year, it makes sense to dig a little deeper and understand more about IR35 and how it will affect businesses and contractors in 2025. Firstly, if you are wondering why it is named so, let me tell you that it has derived its name from the original Inland Revenue press release number 35.

However, it is now also known as off-payroll working rules. It is important to recognize that working with contractors or ignoring IR35 can have severe consequences like penalties and lost income. Depending on how your business engages contractors, IR35 can create both tax risks and significant compliance obligations.

Key Changes Introduced in the Autumn Budget 2024

Offsetting Taxes Already Paid by Contractors

Previously, if HMRC decided a contractor was wrongly classified as “outside IR35,” the business could be liable for the full unpaid tax bill without any credit for taxes the contractor had already paid. However, things are going to change. From April 2024, while calculating their liabilities, businesses are allowed to offset taxes already paid by the contractor. This change makes the financial consequences of misclassification less severe. Here, it is important to remember that compliance is still critical.

Increase in Employer NICs

The Employer’s National Insurance Contributions (NICs) rate has increased from 13.8% to 15%. This change has been effective since April 2025. Also, the threshold at which an employer starts paying NICs on an employee’s earnings is now reduced to £5,000. There is no doubt that for businesses engaging contractors as employees, these changes will increase the overall cost of hiring.

Mandatory Payrolling of Benefits

From April 2026, employers are required to payroll all benefits in kind. The only exceptions are employment-related loans and accommodation. Contractors caught inside IR35 who receive benefits like cars, medical insurance, etc., will have the tax on these benefits collected through payroll.

Changes to ‘Small Company’ Thresholds

From 6 April 2025, the financial thresholds defining a ‘small company’ (for IR35 purposes) have already witnessed a sharp increase. This means more companies will qualify as small companies, and they don’t have to determine the IR35 status of their contractors. However, because the rules use the previous year’s figures, many businesses will not immediately feel the effect of these threshold changes until 2026/27 or even 2027/28 tax years.

What This Means for Businesses

Smaller businesses may escape the administrative burden of IR35 assessments if they meet the new thresholds. Medium and large businesses must continue to assess contractor IR35 status carefully, as any failure to do so could result in serious financial penalties. The increased employer NICs will add to the overall cost of engaging workers, whether employees or inside IR35 contractors. Offsetting offers some protection if errors happen, but proactive compliance is still the safest strategy.

What This Means for Contractors

Contractors will likely be responsible for assessing their own IR35 status if they are working in a small company. If they are caught inside IR35, their take-home pay could fall significantly due to PAYE tax and NICs. Professional advice and status assessments are more important than ever to avoid unexpected liabilities. For contractors receiving benefits in kind, expect changes to how you are taxed from April 2026 onwards.

At Coreadviz, we help our clients to minimize their risks and stay fully compliant. So, if you are still unsure about IR35 status determinations or the implications of these new changes on your business, we can help you make the right decisions for your future.