[Updated Aug 2025]
From April 2025, significant changes to the small company thresholds will come into effect, impacting thousands of limited company contractors and their end-hirers. These changes will be particularly relevant to UK construction firms that regularly engage sub-contractors, and contractors operating through limited companies. Understanding these changes is crucial to ensuring compliance with IR35 rules and avoiding unnecessary tax liabilities.
Updated Small Company Thresholds
A company must meet certain conditions to be classified as ‘small’, and from 6 April 2025, this will see an increase in two of the key financial thresholds that determine a small company’s status.
The new thresholds will be:
- Turnover: No more than £15 million (up from £10.2 million)
- Balance sheet total: No more than £7.5 million (up from £5.1 million)
- Employees: No more than 50 (unchanged)
For construction firms operating within these new small company limits, the key takeaway is that any liability from a failed determination test falls on the contractor supplying his services through a limited company rather than onto the contractor or end hirer.
What This Means for IR35 in Construction
IR35 is a tax legislation designed to assess whether a contractor is genuinely self-employed or effectively working as an employee for tax purposes.
Under IR35, contractors are classified as either:
- Outside IR35 – Contractors who operate with genuine autonomy, carrying financial risk and control over their work.
- Inside IR35 – Contractors who work in a manner similar to an employee and therefore must pay income tax and National Insurance Contributions (NICs) in the same way as a permanent worker.
Before April 2021, contractors determined their own IR35 status. However, under the revised off-payroll working rules, this responsibility shifted to the end-hirer – unless the hirer qualifies as a small company.
How These Changes Impact UK Construction Firms
With the new small company thresholds, the UK government estimates that around 14,000 businesses will move from medium-sized to small. For construction firms, this means that many businesses currently responsible for assessing and managing IR35 status will no longer have to make these determinations—that duty will instead shift back to individual contractors.
However, although these rule changes take effect from April 2025, they will not impact IR35 assessments until the following tax year. This delay is because a company’s size is determined based on the previous financial year-end, meaning IR35 responsibilities remain unchanged for one additional tax year.
What Construction Firms Should Do Now
While these changes won’t take effect until 2026 in practice, it’s advisable for construction firms to start preparing now. Key steps include:
- Review your contractor workforce – If your company is likely to be reclassified as ‘small’, understand which sub-contractors will soon be responsible for their own IR35 status.
- Communicate early – If you regularly engage sub-contractors, begin discussions with them about upcoming IR35 responsibilities to avoid confusion later.
- Ensure compliance – Although your business may no longer be responsible for determining IR35 status, ensuring your contractors understand the rules will help maintain good working relationships and avoid potential disputes.
By staying ahead of these changes, UK construction firms can ensure a smooth transition while maintaining compliance with IR35 regulations.
For more guidance, get in touch with a member of the EEBS team who has a wealth of experience in the construction sector, and will be happy to advise you.
