Abolish IR35 rules

Compliance baseline

Reform's 2024 Contract proposed abolishing IR35. The rules are designed to prevent employees being taxed more lightly by working through personal service companies.

• Contractors and client firms gain flexibility.
• PAYE-equivalent receipts are at risk.
• Avoidance behaviour drives the range.

Core trade-offs

Contractors and hiring firms gain lower compliance costs and more flexibility. The Exchequer risks losing income tax and NI as work shifts into company structures.

• Contractors and agencies gain directly.
• Treasury loses anti-avoidance protection.
• Employee-to-contractor substitution may rise.

Illustrative fiscal impact

+GBP 1.0bn to +GBP 8.0bn. Central estimate: +GBP 3.5bn.

• Positive numbers mean public-finance pressure; negative numbers mean Exchequer savings.
• Avoidance-sensitive is the main scale marker.
• Gross costs and receipt offsets are separated in methodology.
• Behaviour and pass-through widen the range.
• This is not an official costing.

Economic impact by 2027-28

• Jobs: Raises contracting flexibility, but may substitute away from employee jobs rather than create work.
• Wages: Some contractors receive higher net pay; employees may face casualised terms.
• Prices: Limited direct price effect outside professional services and projects.
• GDP / productivity: Could improve matching, but tax-driven incorporation lowers measured productivity quality.

Assessment

Abolishing IR35 reduces compliance burdens for genuine contractors, but also reopens a large boundary between employment and company taxation. The policy may improve flexibility in some professional services, yet the fiscal and fairness risks are substantial if ordinary employment is relabelled as contracting.

Confidence: Low. The contractor base is known only imperfectly, and behaviour around tax boundaries is highly sensitive to enforcement.

Main risks

• Tax leakage: More labour income may be routed through lower-tax company structures.
• Employment substitution: Firms may convert employee roles into contractor arrangements to reduce tax and obligations.
• Fairness concern: PAYE employees may face higher relative tax burdens than similar contractors.

Safeguards

• Replace IR35 with clearer status and anti-avoidance tests.
• Publish HMRC sector exposure estimates.
• Keep strong penalties for artificial incorporation.

Academic evidence

UK government evidence

Sources

• PolicyLens illustrative scenario methodology: Abolish IR35 rules Internal - PolicyLens, 2026
• The Elasticity of Taxable Income Academic article - Saez, Slemrod and Giertz, Journal of Economic Literature, 2012
• Direct effects of illustrative tax changes Official tax data - HM Revenue and Customs, 2026
• Our Contract with You Party policy document - Reform UK, 2024
• Unwilling or Unable to Cheat? Evidence From a Tax Audit Experiment in Denmark Academic article - Kleven, Knudsen, Kreiner, Pedersen and Saez, Econometrica, 2011
• Our Policies Party policy source - Reform UK, 2026

Other Reform UK policies

• Raise income-tax thresholds
• Cut household energy taxes
• Cut fuel duty by 20p
• Cut stamp duty below GBP 750,000
• Raise inheritance-tax threshold to GBP 2m
• Cut corporation tax to 15%
• Raise VAT threshold to GBP 150,000
• Replace some high-street business rates