I sent a link to the long-read post on The Contingent Production Army to Kenne Sykes of Blue Skies Partnership (always a helpful source of advice for myself and my predecessor Tony Lennon). The article included this observation:
“Examples the union has seen and advised on show that someone with less than £45k in revenues will actually keep less of that revenue when trading through a personal service company (PSC) once all of the costs are taken into account, and members with revenues of £65k will only be only marginally better off than someone with a PAYE salary (a figure barely worth the hassle of managing a company) of the same amount – and they will have to go through a lot of headaches, inconvenience and expense in trading through a PSC to get that benefit.”
Kenne has very helpfully replied as follows:
“In our experience, the financial benefits of trading through a PSC mainly are dictated by the personal circumstances of the director/s (e.g. other sources of personal income that are declared on personal Tax Return, personal monies needed to be withdrawn, are there one or more directors etc). I have seen cases where PSC’s with a turnover of £300,000 per year would have been better off trading as schedule D due to the sheer amount of personal cash withdrawn and subsequent personal tax payable, but a PSC with turnover of £70,000 was actually materially better off due to having much different personal circumstances.
A company that had a turnover of £65,000 (and obviously carries expenses that can be offset against tax) being only marginally better off versus that of PAYE does surprise me; the PSC would be taxed on the net profit at lower Corporation Tax rates, whilst the PAYE would be paying significant Higher Rate tax, and so would be interesting to see any relevant calculations or understand the background in more detail just for my own professional curiosity!
Our general guidance to those schedule D individuals that we look after when discussing trading as a Limited Company (this being on basis that they tick all other fundamental boxes of being able to trade as PSC i.e. satisfying IR35 criteria), is that it wouldn’t really be worth their while even considering it until around £60,000/£65,000 due to the increased level of involvement/paperwork and of course fees. That being said, it isn’t one size fits all and so we always look at a broad range of factors on an individual basis so as to be able to provide a specific recommendation.”
My short answer to Kenne is that I saw a calculation for someone with a turnover of around £65k in a PSC that had very minimal operating expenses and they were a few £thousand better off in terms of money drawn down to themselves (dividend income and salary after tax, etc) than someone who was earning £65k PAYE to do a similar job, and I also saw someone with a PSC that had around £45k and there seemed to be very little benefit to them.
However, there are so many apples/oranges that are compared in this kind of calculation that I’d be happy to revise my £65k figure! Either way, the usual footnote applies – the information that this blog provides is only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, and it should not be used in place of professional advice… and I don’t do ‘tax advice’ on this blog….
…but one thing I remember from my freelance days was that it’s generally a mistake to get involved in too many business-structure contortions when you need to focus on being good at what you do – and, of course, Bectu would never advise members to engage in tax avoidance – and also, our general prejudice would be to remind people not to undervalue the employment rights that they lose when they are not Employees (in employment law terms).
One reason I’m posting this is that I suspect some people do involve themselves in those contortions thinking that they will be better off, but in reality, that may not be the case.