Worker status reform: what the new consultation means for IT contractors and the firms that hire them

If you hire or work as an IT contractor, three separate things are moving at once, and it is easy to mix them up. One is a consultation on employment status. One is the tax treatment of contractors, where this year's Budget changed less than many expected. The third is umbrella company rules, which have already changed. Here is what each means.

The employment status consultation

The government has opened a consultation on reforming employment status, aimed at the long-running problem of getting the boundary between employee, worker and self-employed right. It closes on 8 January 2027.

The important point for contractors is its scope. The consultation looks at employment rights, such as who gets holiday pay, sick pay and other protections. It does not change how tax status is decided. That is why the Budget could leave IR35 alone while the consultation runs. Nothing in the consultation changes your obligations today, and any change to employment status would need legislation, so would arrive later.

IR35 stays as it is

The Budget made no change to the off-payroll working rules. If you are a contractor working through a personal service company, the status determination for each engagement still applies. If you are a medium or large client, you remain responsible for the determination and for passing it on. Small clients are still outside the rules, with the contractor's company deciding.

So for now the advice is unchanged. Keep your status determinations up to date and your contracts and working practices consistent with them.

Business Asset Disposal Relief from April 2027

The Budget did change one thing that matters to contractors who run their own limited company. The lifetime limit for Business Asset Disposal Relief, which lowers the Capital Gains Tax charge when you sell or close a business, falls to £500,000 from April 2027. Gains up to the limit get the relief, and gains above it are taxed at the standard rates.

If you are planning to close your company or sell shares, the timing of that decision is now worth discussing with your accountant before April 2027.

Umbrella companies and agencies

Since 6 April 2026, if a worker is paid through an umbrella company, the agency, or the end client where there is no agency, can be made responsible for PAYE and National Insurance if the umbrella does not pay it. HMRC can recover the sum from them. That moves a risk that used to sit with the worker.

In practice, end clients and agencies should check the umbrella companies in their supply chain, and workers should check their payslips and ask who the employer is. The government has also said it will bring in regulation of umbrella companies, which is expected later and would be a separate step.

A short checklist

• Contractors: keep status determinations and contracts consistent, and speak to your accountant about timing if you plan to close or sell a company.
• Hiring firms: confirm who is determining status on each engagement and that your agencies use compliant umbrella providers.
• Everyone: respond to the status consultation by 8 January 2027 if you have views.

Our page for contractors covers how we work with them, and our article on the Employment Rights Act covers the wider changes to employment law.

This article is general information, not legal or tax advice. Take advice from a qualified adviser on your own circumstances.

Sources: GOV.UK, Employment status consultation (October 2026); GOV.UK, Budget 2026 tax measures; GOV.UK, PAYE rules for labour supply chains that include umbrella companies from 6 April 2026; HMRC, off-payroll working rules guidance.