Contractors, freelancers, interim managers and consultants all have one thing in common – when they work through their own limited company they are known as a Personal Service Company (PSC).
Since the definition is quite vague, it can be hard for contractors to understand what constitutes as a Personal Service Company. We’ve outlined all, along with some of the advantages and alternatives available to contractors.
What is a Personal Service Company?
Personal Service Company is a broad term, as most contracts don’t specify that it is actually them who must perform the work. It is usually their limited company that is contractually obliged to perform the work.
A Personal Service Company was first defined in 2000 with the introduction of IR35 legislation. Though there is no clear definition in law, the qualities of a contractor working through a PSC are as follows:
- The contractor is working through a registered limited company.
- The contractor is the director and a shareholder of the company.
- The contractor manages the limited company funds and bank account.
- The contractor provides professional services to clients via their limited company.
Looking to become a successful contractor?
Find out how to maximise your take-home pay and become a successful contractor in our free guide. Also covered in our guide is:
- Getting started – discover which business structure is best for you and how to get started.
- Your tax and financial obligations – all you need to know about your paying tax, filing accounts and what costs you offset.
- Making your business a success – learn how to grow your business, how to market yourself and to forecast for the future.
Advantages of working through a Personal Service Company
- Working through your own limited company is widely regarded as the most tax efficient way of operating as you are managing your own taxes.
- As a limited company director, you have access to claim a number of business expenses, as long as they are ‘wholly and exclusively’ for the purpose of your limited company. You can find more about claiming expenses in our guide to expenses.
- Contrary to popular belief, forming a limited company is relatively quick and easy to do, especially when you enlist the help of an expert such as SJD Accountancy; we can take care of your limited company formation, help you open your business bank account and register you for VAT.
- Contracting can be challenging and rewarding: contractors are often seen in a different light to their employed counterparts. Often they can be seen as specialist consultants and as such aren’t burdened with the day-to-day office politics.
- Contracting can be great for your CV due to the range of experiences and can also be a good way to develop a more rounded professional profile.
Disadvantages of working through a Personal Service Company
Contracting through your own limited company does mean a certain level of administration on your part. You will have a number of responsibilities, including filing your monthly returns, annual accounts with Companies House and issuing invoices. However, a contractor accountant can help with the majority of this.
Are there any alternatives to a Personal Service Company?
The most popular alternative to operating through a limited company is to work for an umbrella company, such as our sister company, Parasol. Working under an umbrella means you will become an employee of the umbrella company. The umbrella company will raise invoices for the time you work and once funds are received from your agency/client, the umbrella company will pay you. Because you are an employee, these payments will already have appropriate deductions for tax and National Insurance.
What you should be aware of is that when you work for an umbrella company, you will be liable for both employee’s (12% and 2% after the higher rate tax threshold) and employer’s National Insurance contributions (13.8% on all earnings). You won’t be able to benefit from the Flat Rate VAT Scheme and this will limit the number of business expenses you can claim.
However, if you’re new to contracting, you only expect to be contracting for a short period of time, or your day rate is relatively low, an umbrella company can be an ideal solution.
Why do companies use contractors?
There are a number of advantages for companies who choose to use contractors: ease of use, no long term commitment, mobile workforce, fewer people on the headcount to name just a few. However, over the last few years, the demand for contractors has been growing and is fast becoming a lifestyle choice for many.
Thinking about working for yourself?
If you’re thinking about working for yourself, but you’re unsure just what this could entail, we’re here to help.
For help and advice getting started as a contractor, setting up your limited company and beyond, our team of experts is on hand to support you along every step of the way.
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