The small company exemption is the rule that takes a medium-size contractor engagement out of the off-payroll (Chapter 10) rules where the end client is small. In that case Chapter 10 does not apply and the PSC stays responsible for its own status under Chapter 8.
"Small" is defined by reference to the Companies Act 2006 s.382 conditions, imported into the off-payroll rules by ITEPA 2003 s.60A. A company is small for a financial year if it meets two or more of three conditions. For financial years beginning on or after 6 April 2025 the thresholds are: turnover not more than £15m (raised from £10.2m), balance sheet total not more than £7.5m (raised from £5.1m), and not more than 50 employees (unchanged). A company usually has to meet, or cease to meet, the conditions in two consecutive financial years before its status changes.
The timing matters and is easy to get wrong. Because a client's obligation for a tax year is set by reference to its last financial year ending before that tax year, plus the two-consecutive-years rule, the earliest a previously medium client can drop out of scope on the back of the raised thresholds is 6 April 2027 (and for many year-ends 6 April 2028). So for 2026/27, most contractors should assume their medium or large clients are still in scope unless the client has confirmed otherwise.