If you work as a contractor or freelancer in the UK, you’ve probably come across the term Personal Service Company (PSC). It’s a phrase that is often used in tax discussions, particularly around IR35, but what does it actually mean in practice?

A Personal Service Company is not a special legal entity on its own, but rather a way of describing a limited company through which an individual provides their services. Many contractors in fields such as IT, engineering, consulting, oil and gas, and other professional services operate in this way.

PSCs have become increasingly common because they can offer:

• A tax-efficient structure for contractors.
• Greater control over how income is drawn (salary vs. dividends).
• The ability to work with clients who prefer engaging contractors through limited companies.

However, PSCs are also at the centre of HMRC’s IR35 rules, designed to tackle “disguised employment” – where a contractor works like an employee but bills through a limited company for tax advantage.

In this guide, we will cover:

• What counts as a Personal Service Company.
• Why contractors and businesses use PSCs.
• How PSCs are taxed compared to sole traders.
• The impact of IR35 and off-payroll working rules.
• The pros and cons of operating through a PSC.

By the end, you’ll understand whether a PSC is the right route for you, and the key compliance points to watch out for.

Useful resource: HMRC – IR35 guidance

What is a Personal Service Company?

A Personal Service Company (PSC) is not a separate legal category of company in its own right. Instead, it is a term commonly used to describe a limited company set up by an individual contractor to provide their services. This structure has become the standard way for many UK contractors and freelancers to operate.

Key Features of a PSC

• Sole director and shareholder: In most cases, the contractor is both the director and main (or only) shareholder of the company.
• Contracts with clients or agencies: Rather than engaging the contractor directly, clients or recruitment agencies contract with the PSC.
• Services delivered through the company: The individual carries out the work, but the PSC is the legal entity providing the services.
• Income paid to the company: Payments go into the company’s business bank account, not directly to the contractor. The contractor then decides how to extract funds, usually via a combination of salary and dividends.

Example

• Sarah is an IT developer working on short-term projects. Instead of being employed by each client, she operates through Sarah Dev Ltd, her Personal Service Company. Clients sign contracts with her company, which invoices them for the work. Sarah then pays herself a small salary plus dividends from company profits.

Why Contractors Use PSCs

• Separation of finances: A PSC creates a clear distinction between personal and business income.
• Flexibility and tax efficiency: Contractors can control how income is drawn, often reducing tax and National Insurance compared with being paid as an employee.
• Professional credibility: Many clients, especially large organisations, prefer or require contractors to operate through a limited company.

Tip: While PSCs can offer tax advantages, they also fall under scrutiny from HMRC, particularly under the IR35 off-payroll rules. Contractors need to ensure they structure their contracts and working practices correctly.

Useful resource: Companies House – Set up a private limited company

Why Contractors Use Personal Service Companies

Many UK contractors and freelancers choose to operate through a Personal Service Company (PSC) because of the practical, financial, and professional benefits it provides.

1. Limited Liability

Like any limited company, a PSC is a separate legal entity. This means the contractor’s personal assets are generally protected if the business runs into financial difficulty or legal claims. The contractor’s liability is usually limited to the value of their shares.

2. Tax Efficiency

Operating through a PSC allows contractors to choose how they take income, typically a small salary plus dividends. This can reduce overall Income Tax and National Insurance contributions compared with being paid entirely as an employee.

• Example: A contractor paying themselves £12,000 salary and the rest as dividends may pay less in NICs than if they had taken all their income as salary.
• However, this tax efficiency is subject to HMRC’s IR35 rules, which can remove these advantages if the contractor is deemed to be a “disguised employee”.

3. Professional Image

Clients and agencies often prefer to engage with limited companies rather than sole traders. A PSC can therefore:

• Enhance credibility and professionalism.
• Make it easier to secure contracts, especially with larger companies and public sector organisations that require contractors to operate via limited companies.

4. Flexibility

Running a PSC gives contractors the freedom to:

• Work with multiple clients
• Control how contracts are managed and invoiced.
• Decide how and when to draw income from the company.

This flexibility is particularly attractive for professionals in industries such as IT, engineering, design, and consulting, where short-term contracts are common.

Tip: While PSCs can provide financial and professional benefits, contractors must carefully manage their contracts and working practices to ensure compliance with IR35 off-payroll rules.

Useful resources: HMRC – Tax on dividends

PSCs and IR35

The most significant issue affecting Personal Service Companies (PSCs) is the IR35 legislation, also known as the off-payroll working rules. These rules were introduced by HMRC to prevent so-called “disguised employment” – where a contractor works like an employee but receives the tax advantages of operating through a PSC.

What IR35 Means

• If HMRC decides your contract is “inside IR35”, your income will be taxed like employment income. This means:
  • Income Tax and National Insurance are deducted at source, similar to a regular employee.
  • The tax advantages of paying yourself via dividends are effectively removed.
• If your contract is “outside IR35”, you can continue to pay yourself a combination of salary and dividends, allowing you to benefit from the potential tax efficiencies of a PSC.

Who Decides IR35 Status?

• Before April 2021: Contractors themselves were responsible for assessing whether they were inside or outside IR35.
• Since April 2021: The responsibility shifted to the client for medium and large private sector organisations (as well as the public sector, which has been under these rules since 2017).
• Small private sector clients: Contractors working for small businesses (meeting Companies Act thresholds) are still responsible for assessing their own IR35 status.

Key Considerations for IR35 Status

HMRC looks beyond the written contract and examines the actual working practices. Important factors include:

• Control: Does the client control how, when, and where you work?
• Substitution: Can you send someone else to do the work, or must you personally perform it?
• Mutuality of obligation (MOO): Is the client obliged to offer ongoing work, and are you obliged to accept it?

Example

• An IT consultant working on-site, using client equipment, and reporting to a line manager may be classed as inside IR35, even if the contract describes them as self-employed.
• A software developer working remotely, using their own equipment, and able to provide a substitute is more likely to be outside IR35.

Tip: Contractors should regularly review their contracts and working arrangements, and where possible, use HMRC’s Check Employment Status for Tax (CEST) tool to assess their IR35 position.

Useful resources:

• HMRC – IR35 guidance
• HMRC CEST tool