Personal Service Company (PSC) and IR35: What Contractors Need to Know

Last updated: September 14, 2026 8 min read

A personal service company (PSC) is a limited company controlled by a contractor through which they provide services to clients. The IR35 or off-payroll working rules apply to an engagement when the contractor would be an employee for tax purposes if they provided the services directly to the client.

Two contractors in hard hats reviewing building plans on a construction site representing workers operating through a personal service company under IR35 rules

Written by: Robert Engeham

Managing Director, Your Company Formations

Key Highlights

A PSC is an ordinary limited company rather than a separate company type defined in law. The contractor normally controls the company and provides services through it.
Public sector clients and medium or large private and voluntary sector clients decide whether an engagement is inside IR35. The contractor’s intermediary makes the decision when the private or voluntary sector client is small.
If an engagement is inside IR35, the deemed employer deducts Income Tax and employee National Insurance contributions and pays employer National Insurance contributions. Outside IR35, the PSC manages its company taxes and the contractor’s remuneration.

What is a Personal Service Company?

A personal service company is not a separate company type defined in law. It is normally a private limited company controlled by a worker who uses it as an intermediary to enter contracts with clients and invoice them for their services.

The contractor is commonly the company’s director and shareholder. The client contracts with the company rather than directly with the individual, but the contract and actual working relationship must still be assessed for employment status and IR35.

Why Do Contractors Set Up a Personal Service Company?

Contractors use a PSC when they want to provide services through a separate limited company rather than trade in their own name. The structure creates a legal separation between the contractor and the company and allows the company to enter into contracts, receive client payments and pay business expenses.

A PSC can provide:

Limited liability for the shareholder, subject to any personal guarantees and the director’s legal responsibilities.
Clear separation between company finances and the contractor’s personal finances.
Control over the company’s contracts, invoicing and business records.
The ability to take money from the company through salary, dividends, expense repayments or a director’s loan, subject to the relevant legal and tax rules.

A PSC also creates additional responsibilities, including maintaining company records, filing annual accounts and a confirmation statement, submitting tax returns and assessing how IR35 affects each engagement.

Should a Contractor Choose Sole Trader Status or a Personal Service Company?

Choosing between sole trader status and a personal service company affects legal liability, administration, tax reporting and how business income is received. The chosen structure does not determine employment status by itself.

Using a PSC does not automatically remove the client’s employment-status or tax responsibilities. The contract and actual working relationship must still be assessed under the relevant employment-status and off-payroll working rules.

The key practical differences are set out below:

Comparison of Sole Trader and Personal Service Company Structures
Factor	Sole Trader	Personal Service Company
Legal structure	The individual and business are the same legal person.	The company is legally separate from its shareholders and directors.
Liability	The sole trader is personally responsible for business debts.	Shareholder liability is normally limited to the amount unpaid on their shares. Directors still have legal duties.
Registration	Register for Self Assessment when gross trading income exceeds £1,000, subject to the trading allowance rules.	Incorporate the company with Companies House before trading through it.
Administration	Keep business and tax records and submit Self Assessment returns when required.	Maintain company records and file annual accounts, confirmation statements and Company Tax Returns.
Tax treatment	Pay Income Tax and self-employed National Insurance contributions on taxable profits.	The company pays Corporation Tax. The director or shareholder pays tax according to how money is withdrawn.
IR35	IR35 does not apply because there is no intermediary. Employment status can still affect how the work is taxed.	IR35 is assessed separately for each engagement undertaken through the company.
How income is received	Business profits belong directly to the sole trader.	Company money must be withdrawn through salary, dividends, expenses or a director’s loan.

How Does an Umbrella Company Differ From a PSC?

An umbrella company employs the contractor and supplies their services to an agency or end client. It operates payroll, deducts Income Tax and employee National Insurance contributions, and provides the employment rights included in the contractor’s employment arrangement.

Working through an umbrella company reduces the contractor’s limited-company administration, but it does not guarantee tax compliance or remove every supply-chain risk. Contractors should check the umbrella company’s margin, pay illustration, holiday-pay arrangements, pension deductions and payslips.

From 6 April 2026, the agency that contracts with the end client, or the end client where no agency is involved, is responsible for ensuring PAYE is operated correctly. HMRC can recover an umbrella company’s PAYE underpayment from that agency or end client.

Contractors should use HMRC’s guidance on working through an umbrella company to understand how their pay and deductions should work.

How Does IR35 Apply to a Personal Service Company?

The off-payroll working rules, commonly called IR35, apply to an engagement when a contractor provides services through a PSC but would be an employee for tax purposes if engaged directly. The rules determine who must assess the engagement and whether employment taxes must be deducted from the fees paid to the PSC.

IR35 is assessed contract by contract. A contractor can therefore have one engagement inside IR35 and another engagement outside IR35.

Who Decides Whether an Engagement is Inside IR35?

Public sector clients and medium or large private and voluntary sector clients must assess the engagement with reasonable care. They must give the contractor and the party paying the PSC a Status Determination Statement (SDS) that states the decision and the reasons for it.

If the client is a small private or voluntary sector organisation, the contractor’s intermediary is responsible for deciding whether IR35 applies.

For financial years beginning on or after 6 April 2025, a company is considered small when it meets at least two of these conditions:

Turnover of no more than £15 million.
A balance sheet total of no more than £7.5 million.
An average of no more than 50 employees.

The threshold changes affect off-payroll working responsibilities from 6 April 2027 at the earliest because company size is assessed using previous financial periods.

Can CEST Be Used to Check IR35 Status?

Clients, workers and agencies can use HMRC’s Check Employment Status for Tax tool to assess a specific engagement. CEST is not the only permitted assessment method, and the client remains responsible for taking reasonable care and providing accurate information.

HMRC states that it will stand by a CEST result when the information supplied remains accurate and follows its guidance. The result can also be saved and used as a Status Determination Statement.

What Factors Determine IR35 Status?

IR35 status depends on both the contractual terms and what happens in practice. No single factor decides every case, but an assessment should consider:

Personal service and substitution: Whether the contractor must perform the work personally or has a genuine right to provide a substitute.
Control: Who decides what work is completed and how, when and where it is carried out.
Financial risk: Whether the contractor risks making a loss or must correct defective work at their own cost.
Equipment: Whether the contractor provides the equipment needed to complete the work, where practical.
Integration: Whether the contractor operates independently or is integrated into the client’s organisation.
Business activity: Whether the contractor markets their services, works for other clients and operates as a business on their own account.
Contractual obligations: What work the client must offer and what work the contractor must accept under the engagement.

The written contract should accurately reflect the actual working practices. A clause that is not genuinely followed will carry less weight in an employment-status assessment.

How Can Contractors Support an Accurate IR35 Assessment?

The contract, actual working practices and supporting records should describe the engagement consistently. Contractors should:

Use an accurate contract: Record the scope, deliverables, substitution rights, control, financial risk and termination terms. The wording should reflect how the engagement operates in practice.
Follow the agreed working practices: Ensure the day-to-day arrangement matches the contract. Equipment, working hours, other clients and substitution can contribute to the assessment, but no single factor automatically determines IR35 status.
Keep supporting records: Retain contracts, Status Determination Statements, CEST outputs, invoices and evidence showing how the work was carried out.

What Happens When an Engagement Is Inside or Outside IR35?

Comparison of Inside and Outside IR35 Outcomes
Outcome	Inside IR35	Outside IR35
Tax status	The contractor is treated as an employee for tax purposes for that engagement.	The contractor is treated as self-employed for tax purposes for that engagement.
Payment to the PSC	The deemed employer deducts Income Tax and employee National Insurance contributions from the payment.	The fee-payer does not deduct Income Tax or employee National Insurance contributions.
Employer charges	The deemed employer pays employer National Insurance contributions and the Apprenticeship Levy where applicable.	The fee-payer does not pay employer National Insurance contributions for the engagement.
PSC responsibilities	The PSC must record the taxed payment correctly in its accounts.	The PSC accounts for Corporation Tax and the tax consequences of salary, dividends and other withdrawals.
Employment rights	Inside-IR35 tax treatment does not by itself create employment rights against the client.	Outside-IR35 status does not create employee rights against the client.

What Can a Contractor Do If They Disagree With an IR35 Decision?

A contractor or deemed employer can challenge a Status Determination Statement by giving the client reasons and supporting evidence. The client must reconsider the decision and respond within 45 days.

The client must either:

Confirm the original determination and explain why it remains correct.
Withdraw the original determination and issue a new one.

The original determination continues to apply while the disagreement is being considered. A contractor can raise a disagreement until the final payment for the engagement has been made.

Insight Off-Payroll Working Rules and CIS

The off-payroll working rules take precedence over the Construction Industry Scheme. If an engagement falls inside IR35, the deemed employer must operate PAYE instead of making CIS deductions from the payment.

CIS registration does not determine the contractor’s employment status. The responsible party must assess the contract and actual working practices before deciding how the payment should be taxed.

Also related: PAYE Reference Number Explained

How To Set Up a Personal Service Company?

Setting up a PSC means incorporating a private company limited by shares. Before applying, decide the company name, registered office, registered email address, director, shareholder, share structure, people with significant control, SIC code and articles of association.

Once these details are ready, you can set up the company by following these five steps:

Verify the director’s identity. Each new director must verify their identity and provide a Companies House personal code as part of the incorporation filing.

Submit the incorporation application. Apply online, through an Authorised Corporate Service Provider or by using form IN01. Once the application is accepted, Companies House issues a certificate of incorporation and company registration number.
Complete the company’s tax setup. Register for Corporation Tax when the company starts doing business and register as an employer if the company will pay a salary.
Set up company records and finances. Keep company and accounting records and maintain a clear separation between company and personal money.
Review each contract for IR35. Incorporating a company does not automatically place an engagement outside the off-payroll working rules.

Article byRobert Engeham

Robert Engeham is Founder and CEO of Your Company Formations and an expert in UK company formation, Companies House compliance and business startups. Having worked with thousands of entrepreneurs from the UK and overseas, Robert regularly provides commentary on entrepreneurship, regulatory reform, corporate governance and the practical challenges facing growing businesses. His work focuses on making complex business topics easier to understand while helping founders build stronger businesses from day one.