Of late, it has become quite popular for individuals to offer their services through an intermediary company. Such individuals should think of establishing a personal service company, as it reduces National Insurance and PAYE income tax.

Services is same as trading

Even if you offer your services, you will be considered a sole trader by the HM Revenue and Customs. You have to register with HMRC and comply with the self-employed tax and National Insurance rules.

However, if you don’t want to be regarded as a sole trader, you can establish a business partnership or limited company. In case you start a limited company, you will be an owner as well as employee of your company. This means you will have to follow a different set of rules for National Insurance and tax.

Personal service company

You can set up an ordinary partnership with a business partner. Here, you will be responsible for losses and expenses the business incurs. If you don’t want to take personal responsibility, you can establish a limited partnership wherein the finances of the company will be separate from your personal finances. If your company makes a profit, you will have to pay Corporation Tax and the rest of the profit can be shared among the partners.

A limited company must have either people or organisations who own shares of the company. In addition, there are directors responsible for running of the company.

The company must be registered with Companies House and when it starts its business activities, you have to inform HMRC.

Before you start a personal service company, educate yourself on the intermediaries legislation, also known as IR35.

Company’s tax responsibilities

Each financial year the company has to collate statutory accounts, send an annual return to Companies House and send Company Tax Return to HRM. Furthermore, if the company’s earnings are more than £82,000 a year, the company must register for VAT.

Partner’s responsibilities

As a director in a limited company, each year you would have to fill Self Assessment tax return. You would have to pay tax and National Insurance through the PAYE system if you get a salary from the company. If you are sharing profits with your partner, you would have to pay Income Tax on your share of the profits.

In case you work as a contractor or sub-contractor in the construction industry, you would have to register with HM Revenue and Customs for Construction Industry Scheme.