What is a personal service company (PSC)?
The intermediaries legislation that governs personal service companies has been in force since 6 April 2000, when it was introduced to counter disguised employment [1]. A personal service company is simply the limited company through which a contractor supplies their own services, and it remains the most common intermediary structure HMRC deals with under the off-payroll rules [2].
A personal service company, or PSC, is not a special legal entity. It is an ordinary limited company, usually with a single director-shareholder who is also the worker. The distinction that matters is tax, not company law: when the contractor would have been an employee of the client but for the company sitting in between, the intermediaries legislation applies and reshapes how the income is taxed [3].
This article explains what a personal service company is, why contractors use one, how the intermediaries legislation and the off-payroll rules interact with it, how the deemed employment payment is calculated, and how a PSC differs from a managed service company.
Key takeaways
- A personal service company is a limited company a contractor uses to supply their own services, typically as sole director and shareholder.
- The intermediaries legislation, introduced on 6 April 2000, taxes disguised employment income as employment income subject to PAYE and Class 1 National Insurance.
- Where the off-payroll rules apply and the client is medium, large or public-sector, the client decides status; only a small private-sector client leaves the decision with the PSC.
- Inside the rules, a deemed employment payment is calculated after a flat 5% allowance for running costs.
- A personal service company is not a managed service company: an MSC has an external provider promoting the structure.
What a personal service company is and why contractors use one
A personal service company is a limited company set up so that a worker can contract with clients through it rather than as a sole trader or an employee. The worker is usually the sole director and main shareholder, and the company invoices clients for the worker's services [2]. The structure is common in IT, engineering, management consultancy and the creative sector.
The appeal has traditionally been how money can be drawn from the company. A director-shareholder can take a mix of salary and dividends, and dividends are taxed at lower rates than salary and carry no National Insurance [11]. A company can only pay dividends out of profits, and a director must not distribute more than the available retained profit [11]. The table below sets out the dividend tax rates for the 2026-27 tax year.
| Dividend band | Rate 2026-27 |
|---|---|
| Ordinary rate (basic-rate taxpayers) | 10.75% |
| Upper rate (higher-rate taxpayers) | 35.75% |
| Additional rate | 39.35% |
The dividend allowance means the first £500 of dividend income each tax year is taxed at 0%, on top of the £12,570 Personal Allowance [9]. The ordinary and upper rates both rose from 6 April 2026, narrowing the historic gap between salary and dividends [10]. Contractors who run their own sole-trader payroll or company payroll still need to operate PAYE on any salary the company pays.
How the intermediaries legislation applies to a PSC
The intermediaries legislation treats income received by the company for the worker's services as the worker's own earnings where the underlying relationship with the client would be employment [1]. To decide that, HMRC applies the same employment-status tests the courts use: mutuality of obligation, personal service and control [8]. Without a minimum of mutual obligation between client and worker there is no employment relationship at all [15].
Since 6 April 2021, responsibility for applying the rules depends on the size of the client. A public-sector body, or a medium or large private-sector client, decides the worker's status and issues a status determination statement [7]. Only where the client is a small private-sector organisation does the personal service company assess its own status under the original legislation [6]. The mechanics of that split are covered in the Moonworkers guide to the off-payroll working rules.
The small-company threshold that keeps status with the PSC
A private-sector client is small, and therefore leaves the decision with the contractor's company, if it does not exceed at least two of three thresholds across two consecutive financial years: turnover over £15 million, a balance sheet total over £7.5 million, and more than 50 employees [14]. The turnover and balance-sheet limits rose for financial years beginning on or after 6 April 2025 [14]. A PSC contracting only with small clients therefore continues to self-assess, which is why the size of each client matters to the contractor's own compliance.
The deemed employment payment
When the intermediaries legislation applies to a PSC that self-assesses, the company must calculate a deemed employment payment and operate PAYE on it, usually treated as paid on 5 April of the tax year the services are provided [1]. The calculation starts from the income the company received for relevant engagements and works through a set sequence [4]. The table below summarises the main steps.
| Step | What happens |
|---|---|
| 1 | Take the income from relevant engagements and deduct a flat 5% for general running costs |
| 2 | Add any payments or benefits the client paid the worker directly |
| 3 | Deduct salary and benefits already taxed as employment income |
| 4 | Deduct the employer National Insurance due on the balance |
| 5 | Report and pay Income Tax and National Insurance on the deemed payment |
The flat 5% allowance in step one covers unspecified running costs and does not need to be evidenced [5]. If the figure at the end is nil or negative, there is no deemed payment and no further employment tax [4]. Directors are assessed for National Insurance on an annual basis even when paid monthly, which affects how a PSC times any salary it does pay. Software platforms that need to run this calculation programmatically can use an HMRC-recognised payroll API to handle the deemed-payment and RTI steps together.
A personal service company is not a managed service company
Contractors sometimes confuse a personal service company with a managed service company, or MSC, but the two are treated very differently. An MSC is an intermediary in which an external provider, in the business of promoting the use of such companies, is involved with the company and benefits financially from it [12]. Where the MSC legislation applies, all payments to the worker are deemed employment income and taxed through PAYE, with no status test to pass [13].
A genuine personal service company, run and controlled by the contractor without an MSC provider steering it, sits outside the MSC rules and is judged on the intermediaries and off-payroll legislation instead [12]. The practical difference is control: a PSC owner makes their own business decisions, while an MSC worker follows a provider's model in exchange for a promised increase in take-home pay [13]. Accountants supporting contractor clients across both structures often manage the payroll through a multi-client payroll dashboard.
Conclusion
A personal service company is an ordinary limited company doing an extraordinary amount of tax work. It lets a contractor invoice clients, retain profit and draw a mix of salary and dividends, but it also brings the contractor within the reach of the intermediaries legislation and the off-payroll rules whenever the underlying relationship looks like employment.
The narrowing gap between dividend and salary rates, combined with the shift of status decisions onto medium and large clients, has changed the calculation for many contractors weighing up whether a PSC still suits them. The structure remains legitimate and widely used, but it rewards contractors who understand exactly when the deemed payment bites, what a client's size means for who carries the compliance burden, and what the penalties for getting IR35 wrong look like.
Frequently asked questions
Is a personal service company the same as being a sole trader?
No. A sole trader is an individual running an unincorporated business, personally liable for its debts and taxed through self-assessment. A personal service company is a separate limited company that contracts with clients, with the worker usually acting as director and shareholder [2]. The company files its own accounts and can pay the worker through a combination of salary and dividends [11].
Does IR35 mean a personal service company is no longer worth it?
Not necessarily. The off-payroll rules only reshape the tax treatment of engagements that would otherwise be employment; genuinely self-employed engagements outside the rules are unaffected [6]. A PSC still offers limited liability, the ability to retain profit and flexibility in how income is drawn. What has changed is that medium and large clients now decide status, so the tax advantage of a PSC depends heavily on the nature of each engagement.
How is the deemed employment payment calculated for a PSC?
The company takes its income from relevant engagements, deducts a flat 5% for running costs, adds any payments the client made to the worker directly, then deducts salary already taxed and the employer National Insurance due [4]. Whatever remains is the deemed employment payment, on which Income Tax and National Insurance are due [5]. If the result is nil or negative, no further employment tax arises.
What is the difference between a PSC and a managed service company?
A managed service company has an external MSC provider involved in and benefiting from the company, whereas a personal service company is controlled by the contractor alone [12]. Under the MSC legislation all payments to the worker are automatically treated as employment income, with no status test [13]. A genuine PSC is assessed under the intermediaries and off-payroll rules instead.
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