PSCs Explained

Although there is no clear legal definition of what exactly constitutes a PSC, in most freelancing circles it is widely regarded as an arrangement with the following characteristics:

• A UK registered limited company.
• The contractor acts as a director of the company.
• He or she is the sole shareholder of the company, though sometimes shares will be split 50/50 with a spouse.
• The contractor manages and controls the company's bank account.
• The contractor supplies professional services to agencies / clients via the PSC.

The main benefit of a PSC is that if you can be judged to be 'self-employed' under current HMRC guidelines, then you will be able to pay yourself a small salary and get most of your income from dividends.  Dividends aren't subject to National Insurance contributions (NICs) and attract a much lower rate of income tax compared to the higher rate tax bands. Below is a brief overview of the advantages and disadvantages of setting up your own PSC.

Advantages

• It is the most tax efficient way of working if you are outside of IR35.
• You can claim a wider range of expenses.
• It enables you to access the Flat Rate VAT scheme.
• You keep complete control of your financial affairs meaning you do not have to risk. your money with any third party administrator.
• It gives you greater opportunity for tax planning than PAYE Umbrella.

Disadvantages

• Some of the paperwork can be complicated and you may need to pay an accountant to do a lot of the work for you.
• It can be costly if you contract for a very short period of time, then go back to permanent employment.
• You will be responsible for issuing invoices, and may have to spend a lot of time chasing late payments.
• There is a lot to set up, such as a business bank account.
• It's not ideal for contracts less than £25k per year.

Further reading

Setting up a limited company in 3 simple steps
High street accountants struggle with IR35
Limited company contractors face business name restrictions