Glossary · UK

What is Personal Service Company (PSC)?

A limited company set up by a contractor to provide their services to clients, allowing income to be taken as salary plus dividends -- the entity at the centre of IR35 off-payroll working rules.

Full Definition

A Personal Service Company (PSC) is a limited company through which a contractor (or other professional) provides their services to end clients, rather than working through PAYE employment. The contractor is typically the sole director and shareholder. The tax efficiency of a PSC comes from the combination of a low director salary (below the NI primary threshold, e.g. GBP 12,570) and the remainder of profit drawn as dividends (taxed at 10.75%/33.75%/39.35% with a GBP 500 allowance, versus 20/40/45% income tax + NI for the same amount as salary). PSCs are the vehicle that IR35 off-payroll working rules target. IR35 tests whether the contractor would be a disguised employee if the PSC did not exist. If IR35 applies: for public sector and medium/large private sector engagements (since April 2017 and April 2021 respectively), the end client must determine status and operate PAYE on payments -- the PSC tax efficiency disappears. For small client engagements, the PSC remains responsible for assessing its own IR35 status. A PSC also provides limited liability, separation of business and personal finances, and a vehicle for pension contributions (employer contributions from the company, reducing corporation tax). The HMRC Check Employment Status for Tax (CEST) tool is used to assess whether a specific engagement falls inside or outside IR35. Contractors outside IR35 typically take home 75-85% of the day rate; inside IR35, take-home is closer to 60-70%.