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What Is a Personal Service Company and How Is It Taxed?

A personal service company (PSC) is one of the most misunderstood structures in UK contracting. If you work through your own limited company and provide services to clients, HMRC may treat your company as a PSC — and that has serious tax consequences. This article explains what a PSC is, how IR35 works, how income is taxed inside and outside IR35, and what you should be doing to protect your position.

What is a personal service company?

A personal service company is a limited company through which an individual — usually the sole or majority shareholder — provides their personal services to one or more clients. There is no statutory definition of a PSC in UK law, but HMRC uses the term to describe companies where the work being delivered depends almost entirely on one person’s skills and labour, rather than on a broader business infrastructure.

The typical structure looks like this: you set up a limited company, the company enters into contracts with clients or agencies, and the company pays you a salary and dividends. On the face of it, that is perfectly legal. The problem arises when HMRC considers that — if the intermediary (your company) were removed — you would look and behave like an employee of the end client. That is precisely what IR35 is designed to catch.

Who typically uses a PSC?

PSCs are most common among contractors and freelancers working in IT, engineering, finance, management consultancy, and healthcare. They also appear in the construction sector and among content creators who take on longer-term brand partnerships.

The PSC model became popular in the 1990s because it offered genuine tax efficiencies: lower National Insurance, the ability to draw dividends, and flexibility over timing income. Those efficiencies are still available — but only if your contracts genuinely sit outside IR35.

What is IR35 and why does it matter?

IR35 is the shorthand name for the intermediaries legislation, introduced in 2000. It targets situations where a worker provides services through an intermediary — usually a PSC — but the working arrangements are so similar to employment that HMRC believes tax and National Insurance are being avoided.

If HMRC decides your engagement falls inside IR35, the income from that contract must be treated as employment income. That means it is subject to PAYE income tax and National Insurance, just as if you were directly employed. The tax advantages of working through a limited company largely disappear.

IR35 does not mean your company is illegal. It means the income from specific contracts is taxed differently. You can have some contracts inside IR35 and others outside — each engagement is assessed individually.

Inside IR35 vs outside IR35: what changes?

Outside IR35

When a contract is outside IR35, your PSC operates like any other small limited company. The company receives fees, pays corporation tax on its profits, and you can draw a combination of salary and dividends in a tax-efficient way. You keep the benefits of the corporate structure.

Inside IR35

When a contract is inside IR35, the deemed employment rules apply. The company must calculate a ‘deemed payment’ — essentially what you would have earned if you were an employee — and apply PAYE tax and National Insurance to it. You lose the ability to treat income from that contract as company profit eligible for dividends.

The practical effect is significant. A contractor earning £80,000 per year through a contract inside IR35 could pay substantially more in tax and National Insurance than one in an equivalent outside-IR35 arrangement.

How is a PSC taxed in 2026/27?

Corporation tax

If your contracts are outside IR35, your PSC pays corporation tax on its profits. In 2026/27, the rate is 19% on profits up to £50,000 and 25% on profits over £250,000. Marginal relief applies between those two thresholds. You can find detailed guidance on how this works on our corporation tax page.

Salary

Most PSC directors pay themselves a low salary — typically up to the National Insurance secondary threshold or the personal allowance. In 2026/27, the personal allowance is £12,570. Employer National Insurance applies at 15% on salary above £5,000, and employee National Insurance applies at 8% on earnings between £12,570 and £50,270. Many directors set their salary at £12,570 to use the full personal allowance without triggering significant NI.

Dividends

Dividends are paid from post-tax profits and taxed at dividend rates, which are lower than income tax rates. In 2026/27, the dividend allowance is £500. Beyond that, dividends are taxed at 10.75% (basic rate), 35.75% (higher rate), or 39.35% (additional rate), depending on your total income. Dividends do not attract National Insurance, which is where the genuine tax saving lies for outside-IR35 contractors.

Income tax bands

In 2026/27, the basic rate of income tax is 20% on income up to £50,270, the higher rate is 40% on income between £50,270 and £125,140, and the additional rate is 45% above £125,140.

Inside IR35 deemed payments

Where a contract is inside IR35, the PSC calculates the deemed employment payment after deducting a 5% expenses allowance (for private sector workers — this allowance was removed for public sector engagements from April 2017 and for medium and large private sector businesses from April 2021). Employer National Insurance at 15% is also deducted before calculating the deemed payment. What remains is treated as employment income and taxed via PAYE.

The off-payroll working rules (Chapter 10)

Since April 2021, medium and large private sector businesses have been responsible for determining the IR35 status of contractors they engage. This is known as the off-payroll working rules (Chapter 10, ITEPA 2003). Public sector bodies have had the same obligation since April 2017.

Under these rules, the end client issues a Status Determination Statement (SDS) to both the contractor and the fee-payer in the supply chain. If the SDS says the engagement is inside IR35, the fee-payer (usually the agency or client) must deduct PAYE and National Insurance before paying the PSC.

Small private sector businesses are exempt from the off-payroll rules. Where the end client is a small company, the PSC itself remains responsible for determining its own IR35 status — as has always been the case under the original Chapter 8 rules.

What counts as a small business?

A business is small if it meets two or more of these criteria: check the latest HMRC guidance for current figures on turnover, balance sheet, and employee thresholds. Check the latest HMRC guidance if you are unsure whether your end client qualifies.

How to determine your employment status

IR35 status depends on the specific facts of each engagement. HMRC looks at a number of factors, drawing on employment law case principles developed over decades. The main tests are:

  • Substitution: Can you send a substitute to do the work? A genuine right of substitution — actually exercised in practice — points strongly towards self-employment.
  • Control: Does the client control how, when, and where you work? High levels of control suggest employment.
  • Mutuality of obligation: Is the client obliged to offer work, and are you obliged to accept it? An obligation on both sides suggests an employment relationship.
  • Equipment and financial risk: Do you supply your own equipment and bear financial risk if a project goes wrong? Self-employed workers typically do.
  • Integration: Are you treated as part of the client’s organisation — appearing on their website, using their email, attending staff events?
  • Exclusivity: Are you free to work for other clients simultaneously?

HMRC provides a free tool called CEST (Check Employment Status for Tax) on its website. It is not infallible and has been criticised for not always reflecting case law accurately, but it is a useful starting point. If the CEST result is ‘inside IR35’, take legal or accountancy advice before accepting it at face value.

Running a PSC compliantly

Running a PSC well goes beyond getting your IR35 status right. There are ongoing compliance obligations that apply regardless of your contract status.

Bookkeeping and records

Keep accurate records of all income and expenses. HMRC can investigate PSC contractors, and clear records are your first line of defence. Good bookkeeping also means you have accurate figures for dividend decisions and tax planning.

Annual accounts and corporation tax

Your PSC must file annual accounts at Companies House and a corporation tax return with HMRC each year. Corporation tax is due nine months and one day after your company’s accounting year end.

Self assessment

As a director, you must file a personal self assessment tax return each year, declaring your salary, dividends, and any other income. The deadline for online returns is 31 January following the end of the tax year.

VAT

If your PSC’s taxable turnover exceeds £90,000 in any rolling 12-month period, you must register for VAT. In 2026/27, the VAT registration threshold is £90,000. Many contractors register voluntarily before hitting that threshold, particularly if they want to reclaim VAT on business expenses. Your VAT returns must be submitted under Making Tax Digital rules via compatible software.

Payroll

Even a one-person director salary requires a PAYE scheme and Real Time Information (RTI) submissions to HMRC. If you take on employees, your payroll obligations increase accordingly.

Contract reviews

Before signing a new contract, have the wording reviewed against IR35 principles. A contract that accurately reflects a genuine outside-IR35 working arrangement provides a useful layer of protection, though HMRC will also look at what happens in practice — not just what the contract says.

Keeping evidence

If you believe your engagement is outside IR35, document the evidence. Keep records of substitution arrangements, multiple client working, project-based invoicing, and any correspondence that demonstrates you are running a genuine business. Evidence gathered at the time of the engagement is far more useful than reconstructions after an HMRC enquiry begins.

PSC taxation is not going away, and HMRC continues to invest in compliance activity in this area. The risk of getting it wrong — facing backdated PAYE, National Insurance, interest, and penalties — is real. Working with an accountant who understands the rules is the most straightforward way to stay on the right side of them.

Frequently asked questions

Do I have to register my company as a personal service company?

No. There is no formal registration process for a PSC. It is a description HMRC applies to your company based on how it operates. If you provide services through your own limited company, HMRC may treat it as a PSC and apply IR35 rules, whether or not you use that label yourself.

Can I have some contracts inside IR35 and some outside?

Yes. IR35 is assessed on a contract-by-contract basis. You can have one engagement that is clearly outside IR35 and another that falls inside. Each must be assessed individually, and your tax position for each will differ accordingly.

What happens if HMRC decides I should have been inside IR35?

HMRC can issue a determination and demand unpaid PAYE, employer and employee National Insurance, plus interest. Penalties may also apply if HMRC considers there was careless or deliberate non-compliance. Enquiries can go back several years, so the amounts involved can be substantial.

Is the 5% expenses allowance still available in 2026/27?

The 5% allowance is only available to PSCs contracting with small private sector clients, where the PSC itself is still responsible for its own IR35 determination under Chapter 8. It was removed for public sector engagements from April 2017 and for medium and large private sector engagements from April 2021.

Can I still pay myself dividends if one of my contracts is inside IR35?

The deemed payment rules apply to the income from the inside-IR35 contract specifically. If your company has other income — from outside-IR35 contracts, for example — that income can still be subject to the normal corporation tax and dividend treatment. You cannot, however, take dividends from income that has already been subject to the deemed payment calculation.

Do PSC rules apply if I work through an umbrella company?

No. Umbrella companies employ you directly and operate PAYE on your income. You are not working through your own limited company, so the PSC and IR35 rules do not apply to umbrella arrangements. However, umbrella companies have their own compliance considerations, and HMRC has increased scrutiny of non-compliant umbrella schemes in recent years.