Reform IR35 contractor rules: calculation note

Central fiscal result

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

Low case: +£0.2bn. High case: +£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 £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: £1.2bn from weaker PAYE/NI enforcement.
• Compliance-cost and activity offsets: £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: +£1.2bn
• Higher activity receipts: -£0.1bn
• Lower HMRC administration: -£0.1bn
• Compliance transition: £0.0bn

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

Main source groups

• HM Revenue and Customs, "Update to impacts of the 2021 off-payroll working rules reform" (2025): HMRC updated evidence on the private-sector off-payroll reform and its revenue/compliance effects; anchors fiscal risk from weakening IR35.
• HM Revenue and Customs, "Direct effects of illustrative tax changes bulletin" (2025): HMRC provides direct-effect estimates for illustrative changes to SDLT, VAT, fuel duties and other taxes; anchors tax costs before behavioural and macro adjustments.
• Office for Budget Responsibility, "Economic and fiscal outlook: March 2026" (2026): The OBR forecast sets the macro, borrowing and receipts baseline used for broad fiscal context; prevents treating tax cuts or spending changes as self-financing.
• Adam, Miller and Pope, "Tax, Legal Form and the Gig Economy" (Institute for Fiscal Studies, 2017): Different tax treatment of employees, self-employed workers and owner-managers creates avoidance and incorporation incentives; relevant to IR35 reform and contractor taxation.
• Saez, Slemrod and Giertz, "The Elasticity of Taxable Income with Respect to Marginal Tax Rates" (Journal of Economic Literature, 2012): Higher-income taxpayers respond more strongly to tax-rate changes through avoidance, timing and real behaviour; important where the policy changes top-pay, capital or business-tax incentives.
• Conservative Party, "Our Plan for Britain" (2026): Used to define the pledge wording, policy scope and implementation scenario being modelled.