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Advantages & disadvantages of PSCS

Forming your own company means that you will be running your own business. You will be a company director, operate the company bank account, and be responsible for the affairs of the company.

A limited company is a separate legal entity from its owners. It can trade, own assets and incur liabilities in its own right. Your ownership of the company is recognised by owning shares in that company.

If you also work for the company, you are both the owner (shareholder) and an employee of that company. When a company generates profits, they are the company’s property. Should you wish to extract money from the company, you must either pay a dividend to the shareholders, or a salary as an employee. The advantage to you is that you can have a balance of these two to minimise your overall tax and national insurance liability.

Companies themselves pay corporation tax on their profits after paying your salary but before your dividend distribution. Effective tax planning requires profits, salary and dividends to be considered together.

There are many advantages as well as disadvantages to operating through a limited company. We have a separate factsheet on ‘Incorporation’ which considers the relative merits as well as the downsides of operating as a company.

In summary the benefits and disadvantages are summarised below:

Benefits

  • If your contract is not caught by IR35 legislation this PSC solution is the most tax efficient way of working; you get to keep more of your income.
  • You have complete control of your financial affairs and company matters.
  • You are running your own business so you can undertake other work outside your normal contract role.
  • You can legitimately claim a wider range of expenses (training, equipment, software, etc).
  • You will have contractor status, as you will be seen to be "representing" the company and "running a business" with its own trading name.

Disadvantages

  • As director you are responsible for maintaining company accounts and compliance with all company and other statutory matters.
  • There are various deadlines which if missed could incur penalties.
  • You are responsible for day to day issues such as invoicing; keeping a simple accounting system and ensuring all forms, returns and accounts are filed by the due dates.
  • Cost of liquidating the company if you decide to cease trading.

Many contractors, particularly first timers do struggle with these responsibilities but rest assured that your FLB account manager will be available to assist with any concerns that you have.