TL;DR

A Personal Service Company (PSC) is a limited company through which an individual provides their services to clients. In the UK, PSCs are central to IR35 - the tax legislation designed to prevent contractors from disguising what is effectively employment as a business-to-business relationship.

What a Personal Service Company Is

A Personal Service Company is, in most cases, a one-person limited company set up specifically so the owner can contract their labour to clients. The contractor is both the director and the sole (or majority) shareholder. Clients pay the company. The company pays the contractor a salary and dividends. The tax efficiency comes from the gap between corporation tax rates and income tax rates.

The structure is entirely legal and widely used. In the UK, hundreds of thousands of contractors operate through PSCs, particularly in IT, engineering, finance, media, and professional services. The issue is not the structure itself - it's when the working arrangement more closely resembles employment than genuinely independent contracting.

HMRC introduced IR35 in 2000 to address what they called "disguised employment" - situations where a contractor does essentially the same work as an employee, under the same conditions, but pays significantly less tax by routing income through a limited company. IR35 requires that if a contractor's engagement would be employment if the intermediary company were removed, they should pay broadly the same tax as an employee.

The determination involves three primary tests:

Substitution: Can the contractor send someone else to do the work, or must they personally perform it?

Control: Does the client control what work is done, when, and how?

[Mutuality of obligation](/glossary/mutuality-of-obligation): Is the client obliged to offer work, and is the contractor obliged to accept it?

A contractor who fails all three looks like an employee. One who passes all three has a stronger claim to genuine self-employment.

Why It Matters for Recruitment

PSC status touches every contingent hire in the UK where the worker operates through their own limited company. Since the 2021 off-payroll working reforms (IR35 reform), the responsibility for determining IR35 status shifted from the contractor to the client organisation - and, by extension, to the staffing firms and recruitment agencies that sit in the supply chain.

For recruiters, this creates a compliance obligation that didn't exist a decade ago. Medium and large businesses must assess whether each PSC engagement falls inside or outside IR35. They issue a Status Determination Statement (SDS) setting out their conclusion and the reasons behind it. If they get it wrong and HMRC investigates, the liability sits with the client (or the fee-payer in the supply chain).

For recruitment agencies placing PSC contractors, the implications are significant:

• Inside IR35 determinations require the agency to deduct income tax and National Insurance before paying the contractor's company - effectively treating the payment like payroll.
• Outside IR35 determinations leave the contractor to manage their own tax affairs.
• Blanket "inside IR35" policies - adopted by many large clients after 2021 to avoid determination risk - pushed many contractors off PSC structures entirely.

For candidates, PSC status is a material part of their rate negotiation. A contractor previously receiving a day rate gross through their PSC can face a meaningful income reduction if determined inside IR35, since they lose the ability to extract profit as dividends.

In Practice

A FTSE 100 bank is [onboarding](/glossary/onboarding) a software architect through a [staffing agency](/glossary/staffing-agency). The contractor operates through their PSC. Before the engagement begins, the bank's procurement team issues an SDS: the engagement is inside IR35.

The contractor was expecting to take home roughly £450 per day net through their PSC structure. With an inside IR35 determination, the agency must deduct income tax (40% on earnings above the higher rate threshold) and employee NICs (currently 8%), plus the bank effectively pays employer NICs on the agreed day rate as an additional cost. The contractor's net position drops to approximately £330-360 per day.

The contractor requests a rate increase to compensate. The agency goes back to the client. A negotiation follows. This is a conversation that plays out thousands of times a week across UK contracting markets.

Key Facts