PSC vs Umbrella: A Decision Framework

What's a PSC?

A Personal Service Company (PSC) is a limited company that you own and direct, through which you bill clients for your contracting work. It's the structure used by virtually all outside IR35 contractors and many contractors with mixed contract status.

Mechanically:

• Your PSC invoices the agency or end client
• The PSC pays you a director's salary (typically £12,570 — the personal allowance)
• After expenses and corporation tax, remaining profit can be distributed as dividends
• You file annual accounts, a corporation tax return, and quarterly VAT returns if VAT-registered

You normally use a specialist contractor accountant to handle the admin (£100–£150/month is typical).

What's an umbrella?

An umbrella company is a payroll provider that employs you for the duration of each contract. The agency or end client pays the umbrella; the umbrella runs PAYE on your behalf and pays you a net salary.

Mechanically:

• The agency pays the umbrella your "contract rate"
• The umbrella deducts: their margin (~£20–£30/week), employer NI (15% above £5,000), Apprenticeship Levy (0.5%)
• The remaining "deemed taxable salary" goes through PAYE
• You receive a payslip like any employee

You file a self-assessment tax return at year-end (unless your only income is PAYE umbrella) but otherwise there's minimal admin.

Tax efficiency comparison

At £500/day in 2026/27, 220 working days, no pension, no expenses:

Structure	Net take-home/year	Effective tax rate
PSC (outside IR35)	£69,932	36.4%
Umbrella (inside IR35)	£65,650	40.3%
Difference	£4,282/year	3.9pp

The PSC structure is materially more tax-efficient at the same headline rate. But that's only relevant when your contract is genuinely outside IR35. Running a PSC for an inside-IR35 contract gains you nothing tax-wise and adds admin.

Admin overhead comparison

PSC:

• £100–£150/month accountant fees
• Annual accounts (mostly done by accountant)
• Corporation tax return (accountant)
• Quarterly VAT returns if VAT-registered
• PAYE/payroll for your director's salary (small)
• Confirmation statement at Companies House (annual, £13)
• Self-assessment for you personally
• Ongoing tracking of expenses, receipts, dividends

Umbrella:

• £20–£30/week umbrella margin
• Submit timesheets weekly
• Self-assessment at year-end (if applicable)
• Nothing else

PSC is more admin. Umbrella is simpler. Accountants take care of most PSC admin, but you still need to track expenses, retain receipts, and oversee dividends. Some contractors find the admin worth it for the tax efficiency. Others don't.

When to choose PSC

A PSC is the right choice when:

• Your current contract is genuinely outside IR35
• You expect outside contracts to be the majority of your work over the next 12+ months
• You're comfortable with the admin overhead and the cost of an accountant
• You're earning enough that the tax efficiency materially exceeds the admin cost (typically £350+/day makes the PSC accountant fees worth it)
• You want to retain profit in the company for future extraction or investment

When to choose umbrella

Umbrella is the right choice when:

• Your current contract is inside IR35
• You expect inside contracts to be the majority of your work over the next 12+ months
• You want minimal admin and no accountant fees
• You're new to contracting and want to test the waters before committing to PSC overhead
• You're on a relatively short contract and the PSC setup cost isn't worth it

The decision tree

1. Is your current contract inside or outside IR35?
   • If outside: PSC is more efficient.
   • If inside: umbrella is simpler with no tax penalty (since you're paying PAYE either way).
2. Is the next 12 months mostly the same status, or a mix?
   • Mostly outside: keep the PSC.
   • Mostly inside: umbrella is fine; PSC adds admin for no benefit.
   • Mix: keeping a PSC running through inside contracts is awkward (you can't pay yourself dividends from inside earnings) but possible. Many mixed-mode contractors retain the PSC through inside periods.
3. Is your day rate above £350?
   • Yes: PSC tax savings justify the accountant fees.
   • No: PSC tax savings might not justify the accountant fees. Run the numbers.
4. How long is the contract?
   • Less than 6 months: umbrella usually wins on simplicity unless you already have a PSC running.
   • Longer: PSC overhead amortises better.

Switching between them

You're not locked in. Many contractors switch routes depending on contract status:

• Outside contract starts: PSC. Resume invoicing through the PSC, pay salary + dividends as normal.
• Inside contract starts: umbrella or keep PSC? Either works. Umbrella is simpler. If you already have a PSC with retained earnings, keeping it open lets you draw dividends from retained profit. If not, umbrella is fine.
• Closing a PSC: If you've left contracting or only have inside contracts indefinitely, you can close the PSC formally (MVL or strike-off). Talk to your accountant — there are tax-efficient ways to do this if you have retained earnings.

Common mistakes

• Keeping a PSC running through long inside-IR35 periods with no retained earnings. You're paying accountant fees for nothing.
• Setting up a PSC for a short-term outside contract. The setup costs and admin can wipe out the tax savings on a 3-month contract.
• Not maximising pension contributions. Both structures support tax-efficient pension routes — many contractors leave thousands on the table by under-contributing.
• Picking an umbrella based on quoted take-home figures. Umbrellas can quote different headline numbers based on different assumptions. Compare margins, not take-home claims.

What to do next

• If you have a specific contract on the table, run the equivalent rate calculation to know what you should be earning.
• If you're undecided between PSC and umbrella, talk to a contractor accountant — most offer a free initial review and can run the numbers on your specific situation.
• If you're inside IR35 and want to verify whether the status is correct, get the contract reviewed by an IR35 specialist.