Contractors' Questions: Should I set up a PSC solely to receive £10,000?

Contractor’s Question: I’ve left full-time employment this year and have already been paid up to the 40% tax level. But I’ve got a chance to earn approx £10,000 as a consultant either as an employee or through a PSC if I set one up.

It’s likely this opportunity won’t present itself again. So -- do I take the money as an employee and take the tax hit of 40% on all the money paid or is setting up a PSC the answer, albeit one with hassle?

Expert’s Answer: On first assessment, looking purely at tax-efficiency, setting up a company, paying corporation tax on the £10,000 (assuming estimated accountancy fees are a nominal £1,500 in value), will leave you with corporation tax to pay of £1,615.

After factoring in your dividend allowance of £5,000, your potential net dividend income is £6,885 (after dividend tax at 32.5%) = £6,272.00. Compare this with a salary of £10,000 x 58% (higher rate tax of 40% plus 2% National Insurance) = £5,800. Therefore, setting up a company purely as a vehicle to receive this income is marginally more attractive.

But you do need to factor in the following issues:

  • Incorporating your company and working through your company is generally a long term commitment -- if you don’t have clarity whether the work will continue on an ongoing basis, then the administrative burden and your director’s responsibilities of running a company can outweigh the tax-efficiency. You should also factor in insurance costs and eventual wind up costs -- if it becomes apparent that no further work will be undertaken in your company.
  • In addition, if you know the contract is for a fixed-term, then your contract is not a ‘temporary place of work.’ The impact of this is that you cannot claim your regular site travel costs from home to your place of work.
  • Last but not least, your working practices. If your company contract mirrors that of any employee, then there is the risk that the IR35 legislation will apply. You should consider an IR35 review if you are concerned in this respect.

(Please note; if your end-client is in the public sector, following recent public sector legislative changes affecting IR35, then any monies you receive in your company should be net of PAYE/National Insurance, unless your end-client decides that you are outside IR35).

In conclusion, if your decision lies squarely between an employment contract and setting up your own limited company, my preference would be to receive the income as an employee.

As a one-off piece of work, direct employment will ensure you meet your tax responsibilities -- together with the fact that because there are no firm plans with regard to future trading in any company, working on an employee basis may be the better option.

If circumstances change later on, then you can assess your options in regard to forming a company at a future date. Good luck!

The expert was Matt Fryer, head of compliance for contractor accountants Brookson.

Monday 11th September 2017