What is a personal service company (PSC)?
Thousands of contractors in the UK operate through a ‘personal service company’ to maximise their pay retention. But what is a personal service company?
Personal service companies (PSC)
A personal service company (PSC) is a term that has been used since IR35 legislation was introduced in 2000. It is merely another way of referring to a contractor’s limited company.
There isn’t a clear definition as such of what a personal service company is. And, it’s rumoured that HMRC uses this to their advantage when conducting tax investigations. However, if there were an official definition of a PSC, it would probably state that PSC’s are limited companies that contractors in the UK set up and become the sole Director of.
When a contractor has a PSC, it’s the PSC that is usually responsible for providing professional services to the end-client. As the sole Director of the PSC, the contractor will conduct the work required. When it comes to getting paid, the fee-payer in the supply chain, usually the recruitment agency or end-client directly, will pay the contractors PSC. This allows the contractor to take advantage of careful tax planning and to pay themselves with a combination of salary and dividends.
Hirers are keen to engage with PSCs
Engaging with PSC’s is an excellent way for end-hirers to reduce liability on their business. Firstly, they’re able to avoid having the contractor on their company’s payroll – reducing their administrative responsibilities and potential liability from employment-related issues. Also, end-clients engaging with PSC’s will pay the PSC the gross assignment rate – and it’s the PSC’s responsibility to ensure the correct procedures are adhered to when it comes to removing money from the PSC (withdrawing salary and dividends, paying tax, etc.).
It was common for large organisations to insist that contractors operate through a PSC to land a role in the past. If the contractor didn’t have a PSC, they wouldn’t be in a position to be hired. However, while this tough approach can be disappointing to contractors who don’t want a limited company, and those who prefer being sole traders, there are also some additional benefits to PSC contractors (not just higher pay). Operating through a PSC gives the contractor (Director) limited liability – which protects personal assets in case legal proceedings we’re ever launched by their hirer, for whatever reason. Limited liability protects contractors’ personal finances and assets.