Comparison Guide · Updated July 2026
Personal Service Company vs Sole Trader Contractor 2026
A Personal Service Company (PSC) is a limited company through which a contractor provides services, offering dividend-based tax efficiency when a contract is outside IR35, alongside limited liability. Sole trader contracting is simpler to run and falls outside IR35 entirely, but has no dividend option and no liability protection. For 2026/27, dividend tax rates are 10.75% (basic), 35.75% (higher) and 39.35% (additional).
TL;DR
- PSC (limited company): IR35 rules apply; salary + dividends if outside IR35; limited liability; more admin
- Sole trader: IR35 does not apply (no intermediary); Income Tax + Class 4 NI on profits; unlimited liability; simpler admin
Side-by-Side Comparison
| Feature | Personal Service Company | Sole Trader |
|---|---|---|
| IR35 applies? | Yes — client/end-client must assess status | No — no intermediary company involved |
| Tax on profit extraction | Corporation Tax 19–25%, then dividend tax 10.75/35.75/39.35% | Income Tax 20/40/45% + Class 4 NI 6%/2% |
| Liability | Limited (company is separate legal entity) | Unlimited personal liability |
| Admin burden | Companies House filing, company accounts, payroll if salary paid | Self Assessment only, no company filings |
| Accountant cost (typical) | Higher (specialist contractor accountant common) | Lower |
| Best for | Outside-IR35 contracts, longer-term contracting, liability protection | Simpler engagements, lower contract values, minimal admin preference |
How IR35 Affects a Personal Service Company
IR35 (the off-payroll working rules) exists specifically to test whether someone working through a PSC is, in substance, an employee of the end client rather than a genuine independent contractor. If a contract is determined "inside IR35", the fee-payer must deduct Income Tax and National Insurance from the contract fee before paying the PSC, largely removing the dividend tax advantage. If "outside IR35", the PSC can pay Corporation Tax on its profits and distribute the remainder as dividends, which is typically far more tax-efficient than an equivalent gross salary.
Why Sole Traders Sit Outside IR35
IR35 is specifically an anti-avoidance rule targeting the use of an intermediary — most commonly a limited company — to disguise what would otherwise be an employment relationship. A sole trader contracts directly in their own name with no company standing between them and the client, so the IR35 legislation simply does not apply. This does not automatically mean HMRC accepts the arrangement as genuine self-employment for all tax purposes — general employment-status tests can still apply — but the specific PSC/IR35 mechanism is irrelevant to sole traders.
Tax Comparison — £70,000 Contract Profit, 2026/27
| Structure | Approx. Tax + NI Treatment |
|---|---|
| Sole trader (£70,000 profit) | Income Tax at 20%/40% bands + Class 4 NI at 6%/2% |
| PSC, outside IR35 (£70,000 profit, salary + dividend split) | Corporation Tax 19% up to £50,000 (25% above, with marginal relief), then dividend tax 10.75%/35.75% on distributions |
| PSC, inside IR35 (£70,000 contract fee) | Income Tax + NI deducted at source by fee-payer, broadly similar to employment |
Illustrative structure only — exact tax owed depends on other income, allowances used, expenses claimed and the specific salary/dividend split chosen. Use HMRC's tools or a qualified accountant for precise figures.
Which Should You Choose?
For a contractor confident their engagements will be assessed outside IR35, and who values limited liability and the flexibility to retain profit in the company between tax years, a PSC is usually worth the extra administrative cost once contract value is reasonably substantial. For lower contract values, shorter engagements, or where the extra accountancy and filing burden outweighs the tax saving, sole trader contracting remains a simpler and entirely valid choice — and it removes IR35 risk from the equation altogether.