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When people talk about a Personal Service Company or ‘PSC’, they’re usually referring to a limited company which has been set up to provide the services of a single contractor, who is usually the sole shareholder and company director of the business.
The term ‘Personal Service Company’ also features heavily in the context of the government’s rules to determine employment status – also known as IR35. These rules ensure workers are classified correctly as employed, or self-employed and pay the correct amount of employment tax.
Just to add to the confusion, it’s also worth noting that ‘PSC’ in the world of business can also stand for ‘Person of Significant Control’ – someone who has the right to exercise significant influence over a company. This is something completely different – you can find out more about those kinds of PSC’s in our article "What you need to know about the PSC register".
Read on to find out more about Personal Service Companies.
Why should I set up a Personal Service Company?
When working as a contractor, you may find that some clients and recruitment agencies prefer to work with limited companies rather than unincorporated sole traders. This is usually the case when contracting for larger organisations and those in the financial sector.
There are other reasons why an individual will work on contracts via a limited company, including limited liability (the separation of your business finances from your own personal finances) and the potential to reduce the amount of tax paid. There’s plenty of advice relating to this in our article, "Sole trader vs limited company, or umbrella: what’s best for you?".
What are the tax implications?
Working through a Personal Service Company can mean that you pay less tax. This is because the PSC will get paid without any tax or NI taken. The PSC will pay Corporation Tax (and possibly other small business taxes) on any profits and the PSC director can pay themselves tax-efficiently with a combination of salary and dividends. Usually this combination results in a lower tax bill and higher take-home pay for the company director when compared to direct employment or sole trade.
HMRC are not particularly keen on this state of affairs, especially where they believe that the contract between the end-client and the PSC is effectively one of employment. HMRC has introduced rules, known as IR35, or ‘off-payroll working’ rules. The rules are intended to make sure that workers, who would have been an employee if they were providing their services directly to the client, pay the same tax and National Insurance contributions as employees. For more detail on the background to IR35 see our IR35 content hub.
If you’re thinking of becoming a contractor working through a Personal Service Company, you’ll need to make sure that:
- you’re aware of IR35
- any contracts you take on have been professionally reviewed in case they fall ‘inside’ IR35.
This could have a big impact on how you get paid, and how much tax and NI you have to pay.
How do I go about setting up a Personal Service Company?
You can register a limited company yourself for just £10, with Crunch Company Formations – we’ll even refund your fee if you sign up for limited company accounting with Crunch.
We’ll also refund your fee if you take out our Small Business Insurance, or open a Barclays business bank account through us.
We’ve got an article about the steps you need to consider when setting up a limited company.
If you’re thinking of setting up a Personal Service Company and you’d like to see how the experts at Crunch can help you with support and advice to set a limited company up for you as well as keeping on top of all your business finances and limited company accounts then why not speak to one of our friendly advisers for a free consultation.
