> ## Content Index > Fetch the complete content index at: https://entrepreneurplus.co.uk/llms.txt > Use this file to discover other available public pages before exploring further. # IR35 for Startups: What UK Founders Need to Know in 2026 - URL: https://entrepreneurplus.co.uk/ir35-for-startups-what-uk-founders-need-to-know-in-2026/ - Published: 2026-11-05T10:30:00.000Z - Updated: 2026-11-05T10:29:59.000Z - Description: Hiring contractors without adding headcount feels simple until HMRC asks who decided their tax status. Whether that’s you depends on your size, and the 2025 threshold rise doesn’t bite until 2027/28 at the earliest. - Author: Victoria Thomas - Tags: Startup Toolkit Most UK founders hire contractors to keep payroll light, then assume IR35 is the contractor’s problem. For a small company, it often is. **IR35 for startups** becomes the founder’s problem once the company outgrows the exemption. A contract’s wording doesn’t settle it, and a wrong call can leave the tax responsibility with you, not the contractor . This guide covers what IR35 is, how HMRC decides contractor status, what inside and outside mean in practice, how the small company exemption works after the 2025 threshold rise, and a simple process to follow whenever you engage a contractor. --- ## What Is IR35, and Why Should UK Startups Care? IR35 for startups comes down to one test: a contractor working through their own company pays employee-level tax if they would otherwise be your employee. IR35 is the common name for HMRC’s off-payroll working rules. They make sure such a contractor pays broadly the same Income Tax and National Insurance as an employee. The contractor’s company is called a personal service company: typically a limited company the worker controls. The rules apply contract by contract, so one contractor can fall inside on one engagement and outside on another. Since 6 April 2021, private-sector clients can carry the responsibility for that decision. --- ## Contractor Status UK: How HMRC Decides If Someone Is Really Self-Employed HMRC decides contractor status by looking at how the work is actually done, not at what the contract says. Whether the rules apply turns on the engagement’s terms and its working practices, so wording alone never settles it. The factors HMRC weighs: - **Mutuality of obligation:** The client must pay for the work and the worker must provide it personally. HMRC’s Employment Status Manual says this shows a contract exists, not whether it is employment. - **Control:** HMRC treats a sufficient degree of control as a necessary pre-condition of an employment contract. - **Substitution:** HMRC lists personal service as an indicator. Must the contractor do the work themselves, or can they send someone else? HMRC also looks at financial risk and whether the contractor is genuinely in business on their own account. **Contractor status UK** decisions therefore rest on evidence: how the person works day to day, not what they signed. --- ## Inside vs Outside IR35: What the Difference Means in Practice Inside vs outside IR35 comes down to who handles the tax: if the contractor is inside, you run it through payroll; if outside, their company does. | Responsibility | Inside IR35 | Outside IR35 | | -------------------------- | ---------------------------------------------------------- | ----------------------------------------------------------------- | | Income Tax and employee NI | You deduct them from fees paid to the contractor’s company | Not deducted by you; the contractor’s company handles its own tax | | Employer NI | You pay 15% above £5,000 a year (2026/27, GOV.UK) | Not due under the off-payroll rules | | Your admin | Payroll | Pay the invoice as normal | For you, inside means payroll and an extra employer cost on every contractor. For the contractor, tax comes off before they are paid. --- ## The IR35 Small Company Exemption: Does It Apply to Your Startup? The **IR35 small company exemption** applies if your startup meets two of three tests: turnover up to £15m, balance sheet total up to £7.5m, or 50 employees or fewer. | Test | Old limit | Current limit | | ------------------- | --------- | ------------- | | Turnover | £10.2m | £15m | | Balance sheet total | £5.1m | £7.5m | | Employees | 50 | 50 | The higher limits apply to financial years beginning on or after 6 April 2025\. You will see “**April 2026**” in plenty of commentary. HMRC says otherwise: for a usual 12-month financial year, the earliest tax year the higher limits affect a client’s IR35 position is 2027/28. The reason is the two-year rule. A company counts as medium or large only if it meets at least two of the three criteria for two consecutive financial years. New startups get a head start. A new company is small in its first financial year, even inside a group. It then needs two consecutive medium or large years to lose that status. Groups are tougher. If a group’s parent is medium or large, its subsidiaries must apply the rules, with group figures aggregated worldwide. Turnover is also added across connected persons, and an acquired company may lose small status from the following tax year. If a corporate investor or parent holds a stake in you, check HMRC’s group guidance or take advice before assuming you’re small. Qualify, and the status decision sits with the contractor’s own company. So IR35 for startups is a size question first and a status question second. --- ## What Happens When Your Startup Outgrows the Small Company Exemption Once your startup outgrows the exemption, you decide the status of every contractor and give them a written determination, instead of leaving it to their company. That written determination is a **status determination statement** (SDS). You must take reasonable care and send it, with your reasons, to the contractor and the party you contract with. Until you do, the tax and National Insurance responsibility is yours. Give no reasons and it stays with you. Contractors can disagree until the last payment. You have 45 days to respond, applying your original decision meanwhile. Miss it and the liability is yours. Get it wrong and it gets expensive: HMRC’s Compliance Handbook sets penalties for careless errors at 15% to 30% of potential lost revenue where HMRC finds the error first. ![IR35 compliance risks and startup financial penalties](https://storage.ghost.io/c/05/a4/05a4a052-18ab-4836-8924-ec8b322c371c/content/images/2026/11/IR35-Compliance-Risk-Assessment-Desk.png) IR35 compliance risks and startup financial penalties Plan before you cross the line. Check headcount, turnover and balance sheet ahead of a hiring push, a funding round or an acquisition. The two-year rule gives you some warning before you lose the IR35 small company exemption, but don’t rely on it. --- ## A Practical IR35 Checklist for Founders Hiring Contractors To handle IR35 for startups, follow five steps with every contractor: check your size, define the work, assess status, document your reasons and review. 1. **Check your company size:** Test turnover, balance sheet and headcount against the £15m, £7.5m and 50-employee limits. Apply the two-year rule and check group and connected-company status. If a contractor asks you to confirm your size, you have 45 days, and they can apply to the court for an injunction if you don’t answer. 2. **Define the work as deliverables:** Write down what you’re buying (outcome, deadline, price) rather than a role. It gives you a clearer basis for judging control and substitution. 3. **Assess status:** This is where you settle inside vs outside IR35\. If you’re outside the exemption, try HMRC’s CEST tool. HMRC will stand by its results if your information is accurate and follows its guidance, and a saved result can serve as your SDS. Have the contract details, who decides the work and how the worker is paid ready first: progress can’t be saved mid-way. 4. **Document your reasoning:** Issue the SDS with reasons and keep your records. 5. **Review the contract and working practices:** Re-check when working practices change or a new contract is negotiated. ## Conclusion Check your size first, because that decides who makes the call. If you’re outside the exemption, assess each contractor on how they actually work, record your reasons and review them when anything changes. **Contractor status UK** decisions stand or fall on evidence, and inside vs outside IR35 can change the cost of every engagement. IR35 for startups is manageable with a repeatable process, but borderline cases need a qualified tax adviser or employment lawyer. --- ## FAQs ### 1\. Does IR35 apply to small companies? The client-side off-payroll rules don’t apply to small private-sector companies, so the contractor’s own company decides their status instead. A small client must still confirm its size if asked. The original IR35 rules (Chapter 8, Part 2 ITEPA 2003) still apply to the contractor’s company. ### 2\. What is the IR35 small company threshold in 2026? A company is small if it meets two of three tests: turnover up to £15m, balance sheet total up to £7.5m and up to 50 employees. The test uses two consecutive financial years, so the earliest tax year the higher limits affect a client’s IR35 position is 2027/28. ### 3\. How do you check if a contractor is inside IR35? If your startup is outside the small company exemption, you decide, record your reasons in an SDS and can use HMRC’s CEST tool, which HMRC will stand by if you give accurate information. --- **Sources:* GOV.UK and HMRC guidance (off-payroll working; Employment Status Manual ESM0516, ESM0543, ESM10006, ESM10006A, ESM10007, ESM10008; rates and thresholds for employers 2026 to 2027; Compliance Handbook) and SI 2024/1303\. Figures reflect the most recent available data at the time of writing (November 2026). This is an editorial summary, not a substitute for tax or legal advice on a specific engagement.* ***The EP+ Editorial Desk covers UK startups, founder stories, and venture capital. All editorial content is independently produced and human-reviewed before publication.***