Personal Services Companies Explained
As a contractor, you’ll need to decide how to organise your business
Many contractors initially opt to set up a limited company, but this approach isn't always the best fit for everyone. The challenge lies in finding a business structure that balances tax efficiency, liability protection, and flexibility. For those looking for an alternative that meets these needs, a personal services company (PSC) could be the solution. Unlike operating as a standard sole trader, a PSC offers unique benefits tailored to contractors, such as enhanced professionalism, reduced tax burdens, and greater control over your financial setup.
At Go Limited, we know that no two businesses are alike, nor are two contractors, which is why we encourage contractors to consider all of the options. If you’re thinking about setting up a limited company but you’re open to other options, a personal services company might be worth considering.
Article Contents
Introduction - Organising Your Business as a Contractor
What is a Personal Services Company (PSC)?
What Industries Usually Have Personal Services
The Benefits of Setting Up a Personal Services Company as a Contractor
What Makes a Personal Services Company Different from Being a Sole Trader?
Limited Company Formation for Contractors: How to Register a PSC
As a contractor, you’ll need to decide how to organise your business. A lot of contractors choose to start by setting up a limited company, but there are other options available. One way to go about things is to set up a personal services company, which comes with a number of unique benefits, and it works in a slightly different way to operating as a standard sole trader.
At GoLimited, we know that no two businesses are alike, nor are two contractors, which is why we encourage contractors to consider all of the options. If you’re thinking about setting up a limited company but you’re open to other options, a personal services company might be worth considering.
What is a Personal Services Company?
A personal services company - sometimes referred to simply as a PSC - is a type of limited company that provides services to clients through a contract. As a contractor, you can create a personal services company by forming a limited company, and then using the limited company to employ yourself as a director or employee, making yourself the business' sole shareholder and company director. This type of limited company formation for contractors is common, and it’s a way for you to offer your services under a contract to other businesses or organisations. Instead of someone hiring you as a full-time employee, freelancer or sole trader, they form a contract with your personal services company.
If you’re a contractor and you’re looking for a way to make the most of having a limited company, the PSC route is one that could work for you. This setup allows you to keep your business separate from personal affairs and assets, providing a whole host of tax benefits and limited liability advantages.
What Industries Usually Have Personal Services Companies?
Though you’ll find PSCs in most industries, they’re especially popular in industries where contractors or freelancers are common. This is because a lot of contractors have realised the advantages of setting up a personal services company, and others have followed suit.
IT and Technology
A lot of IT professionals, software developers and technology consultants set up PSCs to manage their contracts with large clients, especially on projects with a long duration.
Engineering
Contractors in areas such as civil, mechanical or electrical engineering often use PSCs to offer their services to large companies or on specific projects.
Creative
Freelancers in creative fields - such as graphic design, marketing, web development and content writing - often choose to operate through a PSC, as a way to manage their contracts with agencies or clients.
Finance and Accounting
Professionals offering specialised financial advice or accountancy services can also benefit from setting up a personal services company, especially when it comes to tax benefits.
Consulting
A large portion of consultants work with clients on a project-by-project basis, and so they benefit from the flexibility and tax benefits of setting up a PSC. Instead of giving a contract to the individual, clients give the contract to the company.
The Benefits of Setting Up a Personal Services Company as a Contractor
There are several advantages to making your company limited as a contractor and choosing the PSC approach to working, which is why it’s something that a lot of contractors do.
Tax Efficiency
One of the biggest benefits of setting up a limited company for contractors and operating as a personal services company is tax efficiency. With a limited company, you can pay yourself a small salary and take the rest of your income as dividends, which is usually taxed at a lower rate. This can save you a lot of money on National Insurance contributions and income tax.
Limited Liability
By operating through a limited company, you’re able to protect your personal assets and finances. If your business fails or if it takes on debt that it can’t repay, your personal assets - like your home, savings and car - are not at risk. This isn’t the case when you’re a sole trader, where your personal assets could be factored into things
Credibility and Professionalism
Clients often view contractors operating through a PSC as more professional than sole traders and freelancers. A limited company set up for contractors can provide a sense of trust, security and legitimacy that you don’t always have when you’re working as a sole trader. Setting up a personal services company shows that you’re serious about what you do.
Retirement Planning
If you operate through a PSC, you can set up pension schemes and make contributions through your limited company. These contributions are often tax-efficient, allowing you to plan for retirement while reducing taxable income. It’s a way to save money, maximise your pension savings and plan for the future, all through your limited company.
Many contractors initially opt to set up a limited company, but this approach isn't always the best fit for everyone. The challenge lies in finding a business structure that balances tax efficiency, liability protection, and flexibility. For those looking for an alternative that meets these needs, a personal services company (PSC) could be the solution. Unlike operating as a standard sole trader, a PSC offers unique benefits tailored to contractors, such as enhanced professionalism, reduced tax burdens, and greater control over your financial setup. If the standard limited company doesn’t align with your goals, exploring a PSC might be the key to solving these challenges.
As you can see, there are a whole host of benefits that come with having a personal services company, so it makes sense that it’s a route a growing number of contractors are taking. Whether you’re in IT and technology, finance and accounting, or engineering and consulting, you’re sure to find that having a personal services company has its benefits.
What Makes a Personal Services Company Different to Being a Sole Trader?
There are some key differences between being a sole trader and contracting through a personal services company, which we have explained below. A PSC is often the best limited company for contractors, but it’s important to understand that it’s not the same as being a sole trader.
Sole Trader vs. Personal Services Company
A sole trader is someone who operates a business alone. While setting up as a sole trader is quick and simple, it doesn’t have as many benefits as a PSC. For example, as a sole trader, your personal assets are at risk if your business faces financial trouble. This isn’t the case with a PSC, which provides limited liability, meaning that your personal assets are generally protected.
Another difference is that a sole trader’s income is taxed through personal income tax, whereas a PSC can pay dividends, which can result in you having a smaller tax bill.
A limited company for contractors is specifically designed for contracting, offering unique tax planning opportunities. Though PSCs and sole traders are both ways of contracting, a personal services company has its own set of tax rules, especially when it comes to IR35. If you’re contracting using a PSC, you need to be aware of IR35 legislation, which determines whether your contract is truly self-employed or whether you’re considered an employee for tax purposes. If IR35 applies, you could find that your income is taxed as an employee, rather than a self-employed contractor.
Limited Company Formation for Contractors: How to Register a PSC
Choose a Company Name
First things first, you need to come up with a name for your company. You must ensure that the name is unique and follows legal guidelines, otherwise you could find yourself having to change it, which can be time-consuming and stressful.
Register with Companies House
Companies House is the government agency responsible for company registration in the UK. You’ll need to provide your company’s details, including the name, address, and type of business, and submit everything to them.
Set Up Your Company Structure
As the contractor, you will automatically become the director of the company. You may also choose to employ yourself, which means paying a salary and potentially dividends. You can choose to have other directors of a limited company, but personal services companies tend to only have one.
Set Up Bank Accounts and Accounting
To run a successful personal services company, you’ll need a business bank account. Otherwise, how do you expect to get paid? You’ll also need accounting software or services to manage your finances. Though you can choose to handle the accounting side of things yourself, it’s a lot easier with dedicated software.
Pay Taxes and Submit Tax Returns
As a contractor with a limited company, you’ll need to handle your own taxes. A PSC must file annual accounts and tax returns with Companies House and HMRC.
Comply with IR35
If your contracts are subject to IR35 rules and off-payroll working, you’ll need to assess your status regularly to ensure that you're complying with tax laws. IR35 means that in some cases, you might be employed as an ‘employee’ rather than as a contractor, which can change how you’re taxed.
FAQ
Personal limited company definition
A personal limited company is a type of business structure where an individual operates as a contractor or freelancer through a limited company. The individual is typically the sole director and shareholder, using the company to provide services to clients. This setup offers limited liability, meaning personal assets are protected, along with tax efficiency, as income can be distributed through a combination of salary and dividends. Personal limited companies are commonly used in industries like IT, engineering, consulting, and creative fields.
What is a personal services company?
A personal services company (PSC) is a type of limited company often used by contractors and freelancers. It allows individuals to provide services under a contract via the company, benefiting from limited liability, tax efficiency, and professional credibility.
How to ensure your limited company is not a personal services company?
To ensure your limited company is not classified as a personal services company, you need to assess your contracts and working practices under the IR35 legislation. If your work resembles that of an employee (control, substitution, mutuality of obligation), your company might fall under IR35. Seek professional advice or use HMRC's CEST tool to evaluate your status.
How to pay less tax with a personal services company?
A personal services company allows you to optimise tax through a combination of a low salary and dividends, which are taxed at a lower rate than income. You can also claim business expenses and contribute to a pension scheme, further reducing taxable income.
Does a personal services company contractor affect free childcare?
Operating through a personal services company can affect access to government childcare schemes. Since your salary is minimised, eligibility for benefits may be impacted. Consult with a financial advisor to understand how your setup affects childcare funding.
Does a personal services company save money?
Yes, a personal services company can save money through tax efficiencies, such as paying dividends instead of a full salary, claiming business expenses, and utilizsng limited liability to protect personal assets.
What happens to assets when a personal services company closes?
When a PSC closes, its assets can be distributed to the shareholders. This can be done through capital distributions, which might qualify for Entrepreneurs’ Relief (Business Asset Disposal Relief) and be taxed at a reduced rate, depending on circumstances.
Do you have to pay a salary from a personal services company?
Yes, as the director of a PSC, you typically pay yourself a small salary to ensure compliance with National Insurance thresholds. The remainder of your income can be taken as dividends, which are taxed more favourably.
Can you use a personal services company to trade?
Yes, you can use a PSC to trade and offer services to clients. However, it's important to comply with IR35 and ensure that your contracts are structured correctly to avoid being classified as an employee.
Important:
- Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
- When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.
With a personal services company offering contractors a wide range of benefits - from tax efficiencies to limited liability protection - our experts at GoLimited can see why setting up a limited company is so appealing. By setting up a limited company for contractors, you position yourself to not only handle contracts more professionally, but also to stay protected should your venture fail. Whether you’re just starting out in the world of contracting or you’re considering a change from sole trader status, a PSC could be the best choice for you.
