As a contractor, you may have heard about personal service companies (or PSCs) but be a little fuzzy on how this trading structure differs from conventional self-employment. 

This guide will help you understand what this type of business is by answering the following:

  • What is a personal service company exactly?
  • What are the advantages of setting up a personal service company?
  • How does using personal service companies benefit clients?
  • How do taxes work for personal service companies?
  • What do I need to do to set up a personal service company?
  • How can Countingup help manage personal service company accounting?

What is a personal service company exactly?

A personal services company is an incorporated business that provides personal services – as the name suggests! Typical examples might include:

  • Accountancy
  • Construction work
  • Trades – electrical, plumbing or gas installations 
  • Hairdressing
  • Graphics design

Pretty much any role that you can conduct as a self-employed individual could be incorporated within a personal services company.

Although this type of venture can take many forms, the usual scenario is that one individual contractor is a sole shareholder and business director and provides the services. 

You can, though, have personal services companies established as a collective trading arm for several consultants or contractors. 

HMRC created the term personal service company (although note it isn’t a legally defined business category) alongside the IR35 legislation launched in April 2021. 

Why are the benefits of setting up a personal service company?

Businesses and clients often prefer to hire contractors or companies over individuals. That’s because it helps to clarify the trading relationship without muddying the waters of potential deemed employment.

Deemed employment occurs when a client hires a freelancer or a self-employed contractor, but the working structure is similar to a regular employment scenario.

Therefore, if an employer is deemed to be, in effect, employing an individual, they must account for their tax deductions and National Insurance contributions through their payroll system. 

Inevitably, that makes it more expensive to hire a contractor, although the company isn’t entitled to provide additional employee benefits.

Setting up a personal services company as a contractor means establishing a legal separation between yourself as an individual and your company. It may also provide tax efficiencies, with the option to blend your income between a salary and dividend.

How does using personal service companies benefit clients?

The primary benefit for clients in hiring a contractor through a personal services company is that they steer clear of the requirement to assess freelancers for deemed employment.

Many businesses also hire contractors through an agency to delegate tasks such as vetting candidates and checking their credentials. 

Hiring an individual for a one-off project is simpler, and there is a mitigated risk if something doesn’t go to plan. 

However, if you decide to set up a personal services company, you’ll need to take appropriate steps to avoid reputational or financial damage if a client has cause to claim your business. 

Find out what small business insurance you need.

How do taxes work for personal service companies?

The IR35 amendments aim to avoid contractors working as disguised employees without the flexibility and freedom associated with genuine self-employment.

If a contractor holds a position, is tied into regular working hours, cannot change the scope or responsibility of the role, and doesn’t have the option to send a replacement to complete the work, they’re likely a deemed employee.

Differences between employment and self-employment taxes mean that this issue causes significant tax losses for the Revenue and income under-declaration. 

Registering as a personal services company supports the case that you are genuinely self-employed, but it’s worth clarifying what IR35 is and whether it applies to any of your contracts in the past six years before incorporating.

What impact does being inside or outside of IR35 have?

While businesses are primarily responsible for determining whether a contractor is inside or outside IR35, that depends on the organisation’s size, and HMRC can appoint an investigator if they have reason to be suspicious. 

Contractors inside IR35 tax legislation

Individuals inside IR35 are treated as employees in many ways, including in payslip tax deductions. They pay income tax, National Insurance and pension contributions through PAYE. 

Contractors considered inside IR35 pay the standard 12% National Insurance on income between the primary threshold (£184 per week) and the upper earnings limit (£967 a week).

Income tax varies from 20% basic rate up to 45% additional rate, depending on the individual’s annual income.

Contractors outside of IR35 tax

Contractors that don’t fall into the IR35 criteria are independent operators and won’t receive any benefits or have taxes deducted from their income at the source.

Whether trading as a self-employed business or incorporating a personal services company, the same IR35 assessment rules apply.

If not ruled as a deemed employee, contractors can continue to manage their income and expenses, file self-assessment tax returns, and pay liabilities as normal at the end of the tax year.

Creating a personal services company has added advantages, such as taking dividends, deducting expenses from income before calculating tax liability, and paying lower 19% Corporation Tax on the company’s net profits.

What do I need to do to set up a personal service company?

Setting up a personal services company works the same as incorporating any other limited business – the steps are:

  1. Select a company name
  2. Appoint your company officers or directors (which can be yourself or might include another person, often a partner or spouse)
  3. Decide on a registered business address – that might be your home or an accountant’s office
  4. Upload the required documents, such as a Memorandum of Association 
  5. Register your company with Companies house

Learn more about these steps and how to register a limited company in our specialist guide.

How can Countingup help manage personal service company accounting?

Countingup business current accounts blend an accountancy app with your banking, with free in-built software to keep track of your income, tax deductions, outgoings and tax obligations.

For contractors, this functionality is vital to ensure you demonstrate your IR35 status correctly and deduct all eligible allowances from your tax returns or corporation tax calculations.

Download the app here and formalise your personal service company trading structure, backed by a user-friendly and intuitive accounting app to take the hard work out of bookkeeping!