Personal service company (PSC)

There are many advantages of contracting via a PSC, including:

• A PSC is a separate legal entity with very limited personal liability. Directors and shareholders are only liable for the value of their unpaid shares or personal guarantees rather than the full extent of the company’s debts and liabilities.
• Once you have registered your company with Companies House, no one else can use that name, which is beneficial if you want to trade under a particular name.
• As a PSC, your business can benefit from improved credibility and reputation.
• PSCs can be a tax-efficient way for contractors to work as they can pay themselves a combination of salary and dividends.
• Contracting via a PSC means you can claim a range of business expenses and tax deductions that contractors working via an umbrella company cannot.
• You can access more financial and tax planning opportunities when working via a PSC.
• You can exercise different share classes, which is beneficial if you want to divide the company’s ownership or attract investors.
• Many agencies and end clients prefer to work with PSCs over sole traders due to the liability that could arise with the transfer of debt when engaging sole traders.

Contractors and freelancers have been using PSCs to provide services to their clients for many years. However, since the introduction of IR35 legislation in 2000, the amount of contractors and freelancers able to operate through a limited company has significantly reduced. HMRC believed many contractors and freelancers were operating as ‘disguised employees’, providing their services similarly to an employee but through an intermediary, usually their PSC. The legislation was introduced to ensure contractors working similarly to employees would pay the same amount of national insurance and income tax as their permanent counterparts.

In April 2017, the government introduced off-payroll working rules in the public sector. From then on, contractors were no longer responsible for determining their IR35 status. Instead it became the responsibility of the public sector organisation engaging the contractor to determine the worker’s status. If a worker is deemed inside IR35, it is the responsibility of the fee-payer to account for and deduct the worker’s income tax and National Insurance Contributions and pay these to HMRC on the worker’s behalf. The off-payroll working rules were extended to the private sector in April 2021, and the same rules were applied.

If you accept an assignment outside IR35, you can set up a limited company or continue to operate via one if you already have one established. You can pay yourself tax-efficiently with a combination of salary and dividends. However, if you accept an assignment inside IR35, it could be more beneficial to register with an umbrella company, which will process your payments and send the tax deductions to HMRC on your behalf.