What is the definition of a Personal Service Company (PSC)?

The phrase 'Personal Service Company' is also frequently used in the context of the government's IR35 criteria for determining employment status. These standards ensure that workers are accurately classed as employed or self-employed and that they pay the proper amount of employment tax.

To add to the confusion, 'PSC' in the business sector can also stand for 'Person of Significant Control,' which refers to someone who has the authority to wield significant influence over a corporation. This is an entirely new type of PSC; you can learn more about them in our article "What you Need to Know About the PSC Register."

What are the benefits of forming a Personal Service Company?

Some clients and employment agencies prefer to engage with limited businesses rather than unincorporated sole traders while working as a contractor. When working for larger companies or in the financial sector, this is frequently the case.

Limited liability (the separation of your business finances from your personal finances) and the opportunity to lower the amount of tax paid are two major reasons why an individual will work on contracts through a limited company. In our post "Sole trader vs limited corporation, or umbrella: what's best for you?" we provide plenty of guidance on this topic.

What are the tax consequences?

Working through a Personal Service Company may result in lower taxation. This is due to the fact that the PSC will be paid without any tax or NI deductions. The PSC will pay Corporation Tax (and probably other small business taxes) on any income, and the PSC director can pay himself or herself in a tax-efficient manner using a mix of salary and dividends. When compared to direct employment or a sole trade, this combination usually results in a reduced tax bill and larger take-home pay for the company director.

Hmrc isn't happy with this situation, especially if they consider the arrangement between the end client and the PSC as practically an employment contract. IR35, or 'off-payroll working' laws, have been implemented by HMRC. The laws are designed to ensure that workers who would be considered employees if they provided their services directly to the client pay the same tax and NI contributions as employees. See our IR35 content portal for additional information on the history of IR35.

Accountants in Croydon help small businesses and startups with their accounting and taxation matters, to keep their business running smoothly.