A personal service company (PSC) is a type of business structure that has become increasingly popular in recent years, particularly in the UK. A PSC is essentially a limited company that is owned and operated by an individual who provides services to clients. This structure has a number of benefits, including tax efficiency and liability protection, which make it an attractive option for many freelancers and contractors.
For example, a PSC can pay its owner/director a salary, which is subject to income tax and National Insurance contributions (NICs) at the usual rates. However, the PSC can also pay dividends to its shareholders, which are taxed at a lower rate than income tax.
The tax savings from using a PSC can be significant. For example, an individual earning £50,000 a year through a PSC could save around £3,000 in tax compared to if they were a sole trader. This is because they can take a combination of salary and dividends, which reduces their overall tax liability.
Another benefit of using a PSC is that it can help to reduce the impact of IR35 rules. IR35 is a set of regulations that are designed to prevent people from using a PSC to avoid paying tax and NICs. Essentially, IR35 applies when a person provides services to a client through a PSC, but would be classed as an employee if they were working directly for the client. In these cases, the PSC is required to pay tax and NICs as if the individual were an employee.
However, IR35 does not apply to genuine self-employed individuals who use a PSC to provide services to clients. This means that if you can demonstrate that you are genuinely self-employed and are not simply using a PSC to avoid tax, you can avoid the impact of IR35. This can be particularly beneficial if you work in a sector where IR35 is a significant issue, such as IT or finance.
There are some other tax-saving measures that can be used in conjunction with a PSC. For example, you can claim tax relief on expenses such as travel, accommodation, and equipment. You can also make pension contributions through your PSC, which can help to reduce your overall tax liability. Additionally, you can choose to pay yourself a lower salary and retain profits in the company, which can be reinvested or paid out as dividends in future years.
However, it is important to note that using a PSC is not always the best option for everyone. There are some downsides to this business structure, including the administrative burden of running a limited company, the costs involved in setting up and maintaining the company, and the fact that you may be required to pay corporation tax on profits.
If you are considering using a PSC to save on tax, it is important to seek professional advice from a tax specialist or accountant. They can help you to understand the pros and cons of this approach, and can advise you on the best way to structure your business to ensure that you are compliant with all relevant regulations.