A personal service company is a limited company that is set up by a sole contractor or other self-employed individual to provide a specialist professional service to client organisations. Typically, the individual will be the only director and the sole (or majority) shareholder of the company.
Whilst not defined in law, HMRC coined the term ‘personal service company’ when IR35 legislation came into effect in 2000. Structurally, it’s just a normal limited company, usually with a single director who also owns all or most of the company’s shares.
You may see the abbreviation ‘PSC’ used on other websites when discussing personal service companies. However, this shortened form is more commonly associated with ‘people with significant control’ in limited companies. To avoid confusion, we will not use the abbreviation ‘PSC’ in reference to personal service companies throughout this post.
Who would use a personal service company?
Personal service companies are most often used by self-employed people who work as contractors, consultants, and freelancers in the following industries:
- IT and web development
- Marketing
- Copywriting
- Engineering
- Graphic design
- Business consultancy
- Legal consultancy
- Project management
- Finance
- Human resources
- Writing and translation services
Through their company, the individual offers a specialist professional service directly to end clients or via recruitment agencies on a temporary basis.
Many clients organisations and agencies prefer to work only with contractors who operate through their own limited company, rather than those who are sole traders. This is particularly the case when hiring contractors in the finance industry.
The personal service company structure is deemed more formal and professional. It provides a corporate intermediary between the individual contractor and the businesses to whom they supply their services on a short-term basis.
Benefits of a personal service company
There are several benefits to providing professional services through a personal service company, making it ideal for contractors and other self-employed individuals.
1. Separate legal entity
Like all limited companies, personal service companies are distinct entities, which means they are legally separate from their directors and shareholders. There is no such legal separation with the sole trader structure – the business and the person are one and the same in the eyes of the law.
This legal separation enables contractors to limit their personal liability for the debts and actions of the business, present a corporate image, and reduce their personal tax liability.
2. Easier to secure work
Operating through a personal service company makes it easier for contractors to secure work with larger businesses and organisations, especially those in the finance industry.
Many such clients refuse to work with sole traders, choosing instead to engage exclusively with contractors who provide their services through their own limited companies.
The are three main reasons for this:
- Setting up and running a limited company requires greater commitment, because they are subject to stricter compliance and reporting regulations.
- Information on limited companies is a matter of public record – this includes their financial accounts.
- Many client organisations believe that hiring a sole trader may put them at greater risk of being liable to provide employment benefits (though this is not the case).
The reality for many contractors is that setting up a personal service company is essential for bidding on high-value contracts, securing work with certain organisations, and operating in particular industries.
3. Limiting personal liability
A personal service company provides ‘limited liability’ protection to contractors. This means that their financial exposure to business debts is limited to the nominal value of their shares, which is usually £1 per share.
See also: Are shareholders and directors liable for company debts?
Beyond that sum, the company itself is responsible for any business debts that the contractor incurs in the course of carrying out their professional services.
4. Tax efficiency
Providing professional services through a personal service company is more tax-efficient than the sole trader structure or working through an umbrella company.
As the director and shareholder of your own company, you can:
- Pay yourself a modest salary through PAYE, keeping it below the thresholds for Income Tax and National Insurance contributions (NIC)
- Take the rest of your earnings as dividends, which are subject to lower rates of tax and are not liable to NIC
- Make tax-free contributions to a personal pension, up to £60,000 per year
By arranging your remuneration in this way, you can (legally) reduce your personal tax and National Insurance contributions, whilst also making tax-efficient savings toward your retirement.
Additionally, contractors have greater scope to claim business expenses when operating through a personal service company.
5. Opportunities for growth
Many contractors choose to set up a personal service company because it enables them to include other people in the business.
For example, bringing in their spouse as a shareholder or employee, to provide them with a stake in the company, meet the increasing demand for services, or pursue opportunities to grow the business.
6. Flexibility
Personal service companies offer greater flexibility to both contractors and clients.
For the contractor, this structure allows them to be their own boss, choose which work to accept or decline, and achieve a work-life balance that is right for them at any given time.
For clients, they can hire a skilled and experienced professional to work on a short-term basis, as when required, rather than having to recruit an employee to fulfil a temporary requirement.
Beware of IR35 legislation
The concept of personal service companies came about as a result of IR35 legislation, which HMRC introduced in 2000.
Also known as ‘off-payroll working’, IR35 rules aim to tackle the issue of disguised employment, whereby an individual works through their own limited company to disguise the fact that they are effectively working as their client’s employee.
In this situation, the contractor and their client enjoy certain tax advantages that neither party is legally entitled to receive. It also means that the client organisation avoids providing various employment rights and entitlements to the worker.
If you work as a contractor through a personal service company, you must ensure that the nature of your working relationship with clients does not fall inside the IR35 rules.
How to set up a personal service company
The process of setting up a personal service company is exactly the same as forming any other type of private company limited by shares.
The quickest and easiest way to do this is online, through a company formation agent like Quality Company Formations.
To set up a personal service company online, simply choose one of our company formation packages and provide the following information on our online application form:
1. Company name
You must select a company name that is unique and complies with all company name rules. It should end with ‘Limited’ or ‘Ltd’.
2. Registered office address
Every limited company requires a registered office address. This will be your company’s official address and it will be disclosed on public record. Companies House and HMRC will send all official correspondence to this address.
To protect your privacy as far as possible, we advise against using your home address as a registered office. Instead, you should provide the address of your commercial premises, if applicable, or use a professional registered office service.
3. Business activity
You must enter at least one Standard Industrial Classification, or ‘SIC code’, on the application form. You can choose up to four different ones.
See also: Choosing a SIC code for your limited company
The code(s) you use should describe your main business activities – i.e. the professional services that you intend to provide through your company.
4. Director’s details
The director is the person who is responsible for running the company (i.e. you). Most personal service companies have only one director, who is also the shareholder.
You must provide the following details about the director:
- Full name
- Date of birth (must be at least 16 years old)
- Occupation
- Nationality
- Residential Address
- Service Address (residential or other address)
Your residential address will not appear on public record unless you provide it as your service address. The service address is where Companies House and HMRC will send your official director’s correspondence.
To protect the privacy of your home and boost your professional image, we advise using a non-residential address as your service address.
5. Shareholder’s details
Shareholders are the people who own a company through the purchase of one or more shares. Typically, at least one of the shareholders is also a director of the company.
Most personal service companies have only one shareholder, but you can have more. For example, if you wish to include your spouse or other family member in the company.
You must provide the following details about each shareholder:
- Full name
- Date of birth
- Residential Address
- Service Address (residential or other address)
- Nationality
- Three Security Details from the six below (to create an online ‘signature’):
- First three letters of mother’s maiden name
- First three letters of father’s forename
- First three letters of town of birth
- First three digits of your passport number
- Last three digits of your telephone number
- Last three characters of your National Insurance number
- Nature of control in the company (e.g. the person holds more than 25% of the company’s shares)
The nature of a shareholder’s control determines whether they are also a person with significant control (PSC) in the company.
6. Shareholdings
Each shareholder is required to take at least one share in the company. If you are setting up a personal service company with only one shareholder (i.e. yourself), you need only issue one share.
However, you may wish to issue more shares during the company formation process, giving you the option to transfer shares at a later date. For example, if you are planning to make your spouse or other family member a shareholder at some point in the future.
The following information on shares is required:
- Class (type) – e.g. Ordinary shares
- Quantity
- Currency
- Price per share – this is the nominal (par) value of the share, which determines the limit of your personal liability for company debts
- Particulars – the rights attached to the shares, such as voting rights and dividends rights
Issuing shares can be complex in larger companies, but it will be straightforward if you are a contractor setting up a personal service company on your own. In most cases, issuing one ordinary share with a nominal value of £1 will be sufficient.
7. Articles of association
The articles of association is a legal document that defines the rules of your company. We provide free ‘Model’ articles of association with our packages.
This generic version is suitable for most limited companies. However, you also have the option to upload your own bespoke articles, if need be.
Submitting your company formation application
Upon completion of your online application to register a company, we will carry out a free pre-submission review before sending your application to Companies House for approval.
Companies House processes and approve most applications within 24 hours.
If your application is successful, we will provide you with copies of your certificate of incorporation, articles of association, and share certificates by email.
As soon as you receive these company formation documents, your personal service company is ready to start trading.
So, there you have it…
We have explained what a personal service company is, the benefits that this structure provides to contractors, and how to set up a personal service company online.
If you have any questions about this topic or need help forming a company, please leave a comment below or get in touch with our company formation team.
