IR35 in 2026: What UK Software Delivery Actually Costs

The short answer

If your UK business engages software developers through limited companies, the off-payroll working rules (IR35) decide who pays employment taxes on that engagement — and getting it wrong sits with the client, not the contractor. From 6 April 2026 the small company thresholds that exempt you from those duties rise to £15m turnover and £7.5m balance sheet total, so more UK businesses will fall outside the regime, though the lookback in the size test means most will feel the change from April 2027 rather than immediately.

The practical cost question is simpler than the tax question: an inside-IR35 contractor at the UK median day rate costs roughly £132,000 a year once employer National Insurance and the Apprenticeship Levy are added, against about £76,000 all-in for a permanent developer on the median salary. This article sets out the rules, the arithmetic and the decisions that follow. Stratgik is a technology firm, not a law firm or a tax adviser — treat the figures below as a planning model and take professional advice on any specific engagement.

What actually changed for 2026

Two changes matter this year, and they pull in opposite directions.

The small company exemption got bigger. The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 lifted the UK company size thresholds with effect from 6 April 2025. A company is small if it does not exceed two of three limits: turnover of £15m (previously £10.2m), balance sheet total of £7.5m (previously £5.1m), and 50 employees (unchanged). The off-payroll rules borrow this definition, and the uplifted figures apply for off-payroll purposes from 6 April 2026.

Because the size test looks back at the previous financial year, advisers generally expect the practical effect to land from April 2027 for most companies. If your business sits between the old and new limits, diarise the date your accounts confirm your status and keep your determinations running until then.

Umbrella company liability moved up the chain. Also from 6 April 2026, where an umbrella company sits in a labour supply chain, PAYE liability becomes joint and several with a "relevant party". An agency between you and the umbrella generally carries that risk; without one, it lands on you as the end client. If an umbrella deducts PAYE and fails to remit it, HMRC can now look upstream.

One change narrows the population of businesses with off-payroll duties; the other widens the population exposed to somebody else's payroll failure. Neither removes the need to know exactly who is in your delivery chain.

Who determines status, and who pays when it is wrong

If your business is medium or large, you must determine the employment status for tax of every contractor working through an intermediary, issue a Status Determination Statement (SDS) with reasons, and pass it to the worker and the next party in the chain. If the determination is "inside", the fee-payer — usually the agency, sometimes you — operates PAYE and pays employer National Insurance and the Apprenticeship Levy on top.

If your business is small, the position reverses: the contractor's own company decides its status under the original IR35 rules and carries the tax risk.

The cost of getting this wrong is not theoretical. HS2 settled with HMRC for £6.2m covering April 2017 to the end of the 2023/24 financial year, having provisioned £10.2m; it had relied on HMRC's CEST tool to make determinations that turned out to be incorrect. A 200-person software business making the same mistake across a dozen contractors has a smaller bill but the same problem.

One mitigation is worth knowing: since 6 April 2024, HMRC can set off tax and NICs already paid by the contractor and their company against the deemed employer's liability, which stops the same income being taxed twice. It reduces the exposure. It does not remove it, and it does not cover interest or penalties.

The cost stack, compared

The table uses UK market medians and 2026/27 statutory rates. Rates are from IT Jobs Watch for the six months to 22 September 2026: a median contract day rate of £525 for a software developer (255 rates sampled, up 5% year on year) and a median permanent salary of £65,000 (1,295 salaries, up 8.33%). Employer National Insurance is 15% above the £5,000 annual secondary threshold; the Apprenticeship Levy is 0.5% of the pay bill for employers over £3m. Auto-enrolment qualifying earnings remain £6,240 to £50,270.

Two caveats. Employment Allowance — £10,500 for 2026/27 — cannot be set against secondary NICs on off-payroll deemed payments, so the inside-IR35 figure does not benefit from it. And the permanent figure buys fewer productive days than it looks: after 25 days' leave and 8 bank holidays a UK employee delivers roughly 227 working days before sickness or training, putting the effective cost near £333 a day against £603 for the inside-IR35 contractor.

That gap is the argument for permanent hiring, and also why it is incomplete. A contractor can be engaged for eleven weeks and released; an employee cannot. The right comparison is cost per day across the realistic life of the need. For a three-month push the contractor is cheaper; for a platform you will run for five years it almost never is. Our build vs buy tool and technology decision sprint force that question before the budget is committed.

Why "we'll call it a statement of work" does not work

The most common workaround is to relabel a contractor engagement as a contracted-out service. If a service is genuinely contracted out, the supplier — not you — is the end client for off-payroll purposes, and the determination duty moves to them.

HMRC's guidance is unambiguous that this depends on what actually happens, not on the paperwork. Its published position is that a statement of work does not by itself show a truly contracted-out service; the test is the reality of the engagement. HMRC looks at who directs and controls the workers, who decides how the work is done as opposed to what is delivered, who bears financial risk and penalties for non-delivery, who chooses staffing levels, and who resolves performance complaints.

That is a high bar. If your product manager runs the stand-up, allocates the tickets, and would notice immediately if a named individual were swapped out, you have a labour supply arrangement with a service label on it. HMRC has specifically flagged schemes that dress up labour supply as managed services.

The legitimate version is real: hand over an outcome, a deadline, an acceptance standard and a penalty, and let the supplier staff it. That is how our custom software and managed technology engagements are structured — a different operating model from staff augmentation, not a different contract template for the same thing.

CEST is evidence, not a shield

HMRC updated its Check Employment Status for Tax tool in April 2025. It now runs in reviewable sections, asks explicitly about mutuality of obligation, tightens the substitution test to rights that are unrestricted and genuinely exercisable, and focuses financial risk on meaningful unreimbursed exposure. HMRC published the decision matrix: 72 outcome routes, 34 of which return "unable to determine".

HMRC stands by CEST results where the questions are answered accurately and in line with the guidance. Those two conditions carry the weight. The HS2 settlement is what a CEST output looks like when the inputs did not match working reality. Keep the output with the answers you gave and the evidence behind them, and take advice where the result is borderline.

A practical checklist

• Confirm your company size against the new thresholds — £15m turnover, £7.5m balance sheet total, 50 employees, two of three — and record the financial year your status is based on.
• Map every contractor in delivery: direct, via agency, via umbrella, onshore and offshore.
• Identify the fee-payer in each chain, and who would be the "relevant party" if an umbrella defaulted on PAYE after 6 April 2026.
• Run CEST per engagement, not per role, and keep the answers and evidence with the output.
• Issue an SDS with reasons to the worker and the next party in the chain, with a documented disagreement process.
• Re-run determinations when working practices change — a contractor who starts leading a squad is not doing the engagement they were assessed for.
• For anything labelled a contracted-out service, test it against HMRC's indicators before relying on the label.
• Refresh due diligence on umbrellas and agencies: RTI filings, remittance evidence, audit rights.
• Budget inside-IR35 engagements at the full loaded cost, not the day rate.
• Diarise a review before your next financial year end, when your size status may change.

What this means for how you staff delivery

For most UK businesses the off-payroll rules do not change what the right answer is; they remove the cheap version of the wrong one. Inside-IR35 contracting has lost the cost advantage it once had over permanent hiring while keeping the flexibility — a good fit for genuine surge, a poor one for standing capability. Permanent hiring is cheaper per day and slower to arrange, so it wins for anything you will still be running in three years.

Contracted-out delivery sits outside the regime when it is real, and carries the largest risk when it is not. This should be a delivery decision that tax rules constrain, not a tax decision delivery has to live with. Our UK practice and technology strategy team work through those trade-offs with the commercial and compliance sides in the same conversation.

Sources

• HMRC — Understanding off-payroll working (IR35)
• HMRC — Guidelines for Compliance GfC4, contracted-out services
• HMRC — Rates and thresholds for employers 2026 to 2027
• IT Jobs Watch — UK software developer contract rates
• Computer Weekly — HS2 finalises £6.2m IR35 settlement with HMRC

Frequently asked questions

Does IR35 apply if my company is small?

No. If your company is small under the Companies Act definition, the off-payroll working rules do not apply to you as the client. The contractor's own company determines its status under the original IR35 rules and bears the tax risk. From 6 April 2026 the off-payroll rules use the raised thresholds of £15m turnover and £7.5m balance sheet total, with 50 employees unchanged, and a company must not exceed two of the three limits to be small.

When do the new small company thresholds actually take effect for off-payroll purposes?

They apply for off-payroll purposes from 6 April 2026. Because the size test refers to the previous financial year, advisers generally expect most companies to see a change in their off-payroll status from April 2027 at the earliest. Until your own accounts confirm the change, keep your current determination process running.

How much does an inside-IR35 contractor really cost compared with an employee?

On 2026/27 rates and current UK medians, a contractor at £525 a day over 220 days costs about £132,650 a year if you absorb the 15% employer National Insurance and the 0.5% Apprenticeship Levy, against about £75,650 for a permanent developer on the £65,000 median salary including employer NIC and minimum auto-enrolment pension. Per productive day that is roughly £603 versus £333. The contractor buys flexibility, not savings.

Can I avoid off-payroll duties by using a statement of work?

Only if the service is genuinely contracted out in practice. HMRC's published guidance states plainly that a statement of work does not by itself demonstrate a contracted-out service, and that the test is the reality of the engagement rather than how the contract is labelled. If you direct the workers, set how the work is done, and control staffing, the label will not hold.

What changes for umbrella companies from April 2026?

Where an umbrella company is in the supply chain, PAYE liability becomes joint and several with a relevant party. If there is an agency between you and the umbrella, that agency generally carries the liability. If there is no agency, it falls to you as the end client. Map your chains and refresh due diligence on remittance and RTI compliance.

Is CEST enough on its own?

It is useful evidence, not a guarantee. HMRC stands by CEST results where the questions are answered accurately and in line with its guidance, and 34 of the tool's 72 outcome routes return "unable to determine". Keep the answers and supporting evidence with the output, and seek professional advice where the result is borderline.

Off-payroll status is a tax question with delivery consequences, and the two are usually decided in different rooms. If you are sizing a UK build or managed service and want the staffing model, the cost model and the compliance position settled together, start with our United Kingdom hub or our UK compliance practice. Written by the Stratgik team. Stratgik is a technology consultancy, not a law firm or tax adviser; this is general information, not legal or tax advice.