What are personal service companies? Do you need a PSC? Are you a PSC? What are the advantages and disadvantages of working through a personal services company?
Contractors, Freelancers, Interim Managers, Consultants…who work through their own limited companies are often referred to as ‘personal service companies’.
The term is somewhat broad as most contractor contracts don’t specify that it is actually them who must perform the work, it is usually their limited company that is contractually obliged. However, on balance it does seem like a fair and accurate description for how most single personal limited company contractor’s work.
There are, as with most things, pros and cons for working as a contractor through a limited company.
Pros and cons of working through a personal service company
- Working through your own limited company is the most tax efficient way of working, which is fair as you are managing your own company and tax affairs.
- There is a certain degree of administration, most contractors settle into a routine after a few months with admin taking around 15-20 mins per month (this assumes you have a good contractor specialist accountant helping out).
- You will have access to a wide range of business/contractor expenses – Contractors and indeed all businesses can claim most things that are ‘wholly and necessary for business purposes’: if you keep this definition in mind you won’t go too far wrong knowing what expenses you can claim.
- Professional way of working – Being limited (forming a limited company just takes 5 minutes), having a company, a business bank account and being registered for VAT may help clients build a professional picture of you and your commitment to contracting.
Alternatives to PSCs
There are alternatives to operating as a limited company and a personal service company, you could choose to work through an umbrella company, indeed our sister company Parasol is an umbrella company.
An Umbrella Company will raise invoices on your behalf, they will then, once funds are received from your agency/client, make payment to you with the appropriate deductions for tax and national insurance (fees for operating through an umbrella company are similar to those using an accountant).
However, there is something to bear in mind, you will pay more tax through an umbrella company, which again is quite fair as essentially you’ll be an employee of the umbrella company, you will be liable for both employee’s (2011/12 – 12% and 2% after the higher rate tax threshold) and employer’s national insurance contributions (2011/12 – 13.8% on all earnings) plus you won’t be able to benefit from the Flat Rate VAT Scheme. But for short sub, three-month contracts, or contracts less than £25k per year, some contractors do make use of umbrella companies (read more about the advantages and disadvantages of limited vs umbrella).
Why do clients use contractors?
Ease of use, no long-term commitment, mobile workforce, fewer people on the headcount, the only way to get some specialist services…to be honest, the list is endless.
However, over the last few years, the demand for contractors has been growing and is fast becoming a lifestyle choice for many. Plus with the end of life-long employment in the same company, the end of final salary pensions and the beginning of statutory redundancy payments rather than gilt edges good-byes that used to exist means it’s often mutually beneficial for both contractor and client to operate this way.
Self Assessment tax return: service company question
Something that does confuse people is the question on the self-assessment questionnaire that asks ‘if you provided your services through a service company’. You provided your services through a service company if:
- you performed services (intellectual, manual or a mixture of the two) for a client (or clients);
- and the services were provided under a contract between the client(s) and a company of which you were, at any time during the tax year, a shareholder
- and the company’s income was, at any time during the tax year, derived wholly or mainly (that is, more than half of it) from services performed by the shareholders personally.’
It is quite a wordy and somewhat complicated question but really it is just capturing what payments were made via salary and those by dividends. If you have any questions about this please feel free to give us a call on 01442 275789.
Final thoughts about Personal Service Companies and Contracting
Contracting can be challenging and rewarding; without a doubt, contractors are 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; it can also be a good way to learn what a company is really like before maybe becoming a full-time employee if that’s your end goal. Contracting can be great for your CV due to the range of experiences and also be a good way to develop a more rounded professional profile.
Having a good specialist contractor accountant and setting your limited company up in the best way does help and of course, and is something we’d be more than delighted to help with. Visit our contact us page or request a call back below.