Limited companies are a popular operating structure in the UK – Personal Service Companies, or PSCs, are a type of limited company that is set up to offer the services of one contractor. This contractor is also the only shareholder in the company, as well as its only director.
If you’re taking the leap into self-employment, you need to get the right business structure in place, so knowing more about PSCs can help you to make the right decision for you.
What is a Personal Service Company?
While PSCs are, as mentioned, limited companies run solely by an individual, providing services through a limited company, HMRC hasn’t actually created a legal definition for these types of companies. Because the term ‘personal service company’ appeared due to the IR35 legislation, many are unhappy about this lack of definition, since it can create a dubious situation when it comes to tax investigations.
As contractor accountants, we strive to help our clients navigate the complex world of UK finance and law, so you can get in touch with us if you’re unsure whether a PSC is the right structure for you.
Personal Service Company and IR35
Personal Service Companies, as a term, was first mentioned by HMRC back in 2000 when the government introduced their intermediaries’ legislation. PSCs, therefore, are heavily associated with IR35, which aims to ensure individuals and businesses receive the correct classification when it comes to paying tax.
Many self-employed individuals eventually choose to operate through a limited company instead of remaining sole traders, and not just because limited companies can be more tax-efficient. The truth is that many businesses and recruitment agencies won’t hire workers who are sole traders and prefer to work with companies, so they may not have a choice in the matter.
IR35 status determines whether an individual is a ‘disguised employee’. When providing services via a PSC that fall outside IR35, the contractor engages with clients through his or her company, and the client will then pay the PSC for the services provided without deducting income tax and National Insurance Contributions (NICs).
However, HMRC may consider the contractor an employee, so PAYE and other deductions have to be made in that case. Otherwise, you risk being investigated by HMRC and having to pay any employment taxes that would have been due.
The changes made to the off-payroll legislation, which are now set to come into effect from April 2021, mean that the IR35 status of an engagement will now be determined by the end client or agency.
Still, while it’s only natural to want to avoid being caught within IR35, you don’t have to panic as long as you follow the rules set out by HMRC. This means paying the correct amount of PAYE and National Insurance Contributions for contracts that are inside IR35.
In addition, IR35 applies to contracts, not to your whole business, so you may have a mix of jobs that fall inside and outside IR35.
Benefits of Setting Up a Personal Service Company
Whether or not you’re changing from a sole trader to a limited company owner because you had to, there are many benefits from operating through a limited company, including the following:
Dividends – Contractors with Personal Service Companies can pay themselves by using both a salary and dividends, which is often more tax-efficient. This means your take-home pay is higher.
No Employer NICs – Your clients may benefit as well, as they won’t pay employer National Insurance Contributions on the money paid to the PSC. And, because you’re not their employee, they don’t have to offer things like holiday pay and maternity leave.
Claiming Expenses – You may be able to claim more expenses with a PSC when compared to a sole trader model.
Easy Set Up – Setting up a limited company is not as difficult as you may believe. On the contrary, it’s actually quite simple and straightforward and you can complete it in one working day more often than not. However, if you’d like professional help in order to ensure that all documentation is correct or if you don’t have the time to do it, then consider Gorilla Accounting. As limited company accountants, we can help with anything you require, from setting up your company and registering it with Companies House to help you prepare your tax returns.
Better Reputation – Limited companies, including PSCs, are considered more professional by a lot of businesses, which can help you to land the contracts you want.
As our client, you have your own dedicated accountant and 24/7 access to FreeAgent accounting software, which allows you to access your accounts on the go and from any device. This will help you to stay on top of your paperwork, making it easier to stay compliant as a PSC owner.