Tax implications for Personal Service Companies

Well, the logic behind topic and taxations consequences may not be easier for students to comprehend. Here, I have tried to produce etymology of Personal Service Close companies in summarized and comprehensive way that is easy to understand for students preparing for Taxation paper.


Self-employment results in less taxation cost if compared with employment, as earnings are taxable at lower rate and NIC payable by the employer is avoided. Resultantly employees incorporate their own companies and provide services to the client company to avoid tax cost.

The employee services structure is best described by the following diagrams;

Serving as Employ

Serving as separate company


Personal Service Company (PSC) is any company that is owned by single person and the sole purpose of its creation is to serve its client company.

Taxation Rules:

  • IR 35
    anti-avoidance legislation prevents formation of Personal Service Companies,
  • HMRC will determine case by case basis presence of a personal service company.


Taxation Consequences:

  1. Where salary paid is less than employment income from relevant engagements (i.e. portion of earnings is retained in serving company or paid through dividend to employee), the excess (less allowable expenses) are treated as deemed employment income.
  2. Allowable expenses are:
    1. Expenses deductible under normal employment income
    2. Employer NIC paid during the year including NIC due on employment income
    3. Employer pension contribution
    4. Flat 5% of gross employment engagements.
    5. Capital allowances on items provided to employee.
  3. Tax is payable on excess income by the end of 5th April of the tax year.
  4. Any tax paid on dividend received from personal company is deductible to avoid double taxation.