What is a personal service company (PSC)?
A Personal Service Company (PSC) is a term often used to describe a limited company of which the sole or main shareholder is also its director. However, a PSC can provide the services of a small group of individuals with more than one shareholder. Instead of taking up employment, a contractor working through a PSC will supply professional services to end clients directly or via a recruitment agency and can be used for any role deemed outside IR35.
What are the advantages of working through a personal service company?
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.
What are the disadvantages of working through a personal service company?
There are a few disadvantages of setting up a PSC which you should consider:
- Limited companies must be incorporated at Companies House; any information you provide is a matter of public record and can be viewed by anyone.
- Setting up a limited company can be more complicated than other business models, as the accounting requirements are often time-consuming and more complex.
- Limited company accountancy can be expensive, depending on how much administrative and accountancy work you want the accountant to do. Please note that accountancy fees are a tax-deductible company expense.
Personal service companies and IR35
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.
Arrange a consultation to discuss our contractor accountancy service
Having a good accountant is essential to operating your business efficiently as a contractor. Churchill Knight & Associates Ltd can provide contractors and freelancers a proactive and informative service. Our FCSA-accredited accountancy service is designed to make your life as easy as possible. It suits contractors and freelancers in any industry at any career stage.
To learn more about our contractor accountancy service, please call 01707 871622. Alternatively, please schedule a consultation, and a team member will contact you to discuss your accountancy requirements.
Our dedicated self-assessment tax department processes thousands of tax returns for UK taxpayers every year. If you need to submit a self-assessment, contact us today for a competitive quotation or call our friendly sales team on 01707 871622.
High Income Child Benefit Charge (HICBC) and self-assessment tax returns
Our latest article explains the High Income Child Benefit Charge (HICBC) and how you need to report the tax charge on your self-assessment tax return. What…
Do I need to submit a self-assessment tax return?
The 2023/24 self-assessment tax return filing deadline is the 31st January 2025, and you need to notify HMRC by the 5th October if you need to…
A contractor’s guide to VAT
If you are new to contracting or considering setting up a limited company, you may wonder how VAT works. We've created a contractor's guide to provide…
Economic Review of August 2024
Our latest article provides an economic review of August 2024. It explores key areas such as nominal pay is now rising at its slowest pace, the…