PolicyLens

Methodology note

Reform IR35 contractor rules: calculation note

Scenario assumptions behind the Reform IR35 contractor rules estimate. The figures are illustrative and exclude unrelated Conservative pledges.

View main policy page: Reform IR35 contractor rules

Central fiscal result

+GBP 1.0bn - Net fiscal impact in 2028-29

Low case: +GBP 0.2bn. High case: +GBP 3.5bn. Positive numbers are fiscal costs or borrowing pressure. Negative numbers are Exchequer savings or receipts.

Scenario and baseline

  • Model moderate weakening and simplification of IR35 by 2028-29.
  • Central fiscal cost is GBP 1bn.
  • Baseline is current off-payroll rules for employee-like contractors.
  • Abolition is treated as the high-cost case.

Affected population

  • Affected population is contractors, personal service companies and client firms.
  • Direct gains include lower admin and more flexible contracting.
  • Indirect exposure includes employees competing with lower-tax contractors.
  • Revenue risk depends on classification behaviour.

Gross impact

  • Central revenue loss: GBP 1.2bn from weaker PAYE/NI enforcement.
  • Compliance-cost and activity offsets: GBP 0.2bn.
  • Low case assumes simplification without major avoidance.
  • High case assumes broad weakening close to repeal.

Fiscal build-up, central case

  • Lost PAYE and NI receipts: +GBP 1.2bn
  • Higher activity receipts: -GBP 0.1bn
  • Lower HMRC administration: -GBP 0.1bn
  • Compliance transition: GBP 0.0bn

Central net impact: +GBP 1.0bn in 2028-29.

Behaviour and pass-through

  • Low case assumes rules are clarified, not weakened.
  • Central case assumes some additional incorporation and contractor substitution.
  • High case assumes large reclassification of employee-like work.
  • Compliance-cost savings mainly benefit firms and contractors.
  • No productivity gain is treated as automatic.

Phasing

  • 2026-27: +GBP 0.2bn. Preparation or partial implementation.
  • 2027-28: +GBP 0.8bn. Main ramp-up year.
  • 2028-29: +GBP 1.0bn. Target-year central estimate.
  • 2029-30: +GBP 1.0bn. Continuation at steady-state assumptions.

Main source groups

  • con-plan-2026: Conservative live policy page; used to identify current pledge wording.
  • hmrc-ir35-2025: HMRC off-payroll update; revenue risk from IR35 reform.
  • hmrc-ready-2025: HMRC tax ready reckoners; main tax-cost anchor.
  • obr-efo-mar-2026: OBR March 2026 forecast; fiscal and macro baseline.
  • adam-miller-pope-2017: Tax and legal form; informs behavioural and incidence assumptions.
  • saez-slemrod-giertz-2012: Taxable-income responses; informs behavioural and incidence assumptions.