Freelance stress

Sole Trader Vs. Umbrella Vs. PSC

Arguably the biggest appeal to becoming working independently is the flexibility; that you get to set your own terms when it comes to your career and daily working life.

There are a number of options and working routes you can choose from, which generally fall into three common categories: sole trader, umbrella company, and Personal Service Company (PSC).

But which one should you choose, and what are the pros and cons of each?

Sole trader

Registering as a sole trader is one of the first things a lot of people do when they start to work for themselves. It’s simple to do and lets HMRC know that they’re working for themselves.

Self-employed sole traders can keep all the business’s profits once they’ve paid tax on them, but are personally responsible for any losses the business makes.

Pros of being a sole trader

Being a sole trader is the epitome of flexible working. You get to choose your working hours, mix with clients at your leisure, work whenever you wish and do what you want at your own pace to bring in the revenue you need to live. 

There is less paperwork than some other options and accounts are simpler to do, and business expenses are tax deductible. As a sole trader you are self-employed, and you can also employ people if you wish.  Being a sole trader is simply trading as yourself, under your own name.

Cons of being a sole trader

You have to keep records of your earnings, business expenses and more to send a Self Assessment Tax Return to HMRC every year.  A sole trader’s biggest pros can also be its biggest cons. 

By far the biggest concern for sole traders is the blurred lines between your personal finances and your business finances.  

If the business makes a loss this is also effectively the same as losing your personal finances, e.g. if someone makes a claim against your business your personal assets are also at risk.  By comparison, a limited company set up separates business finances from your personal assets.  

Umbrella company

An umbrella company is a useful halfway house, it has all the flexibility of working for yourself but with the benefits of being an employee.  

By signing up to an umbrella company you become the umbrella’s employee, but you still have the freedom to work how, where and when you choose.  As well as employing you, the umbrella will handle all of your financial admin, insurances and other matters.

(NB not all umbrellas will employ you, check the paperwork to ensure you are clear about your employment status.) 

Pros of an umbrella company

Becoming an employee of an umbrella gives peace of mind. As an employee, you will have access to employee benefits such as pension, holiday pay, sick pay and more. You can focus solely on your work as the umbrella will handle admin, paperwork, tax contributions and more.  

The full amount of your income received via an umbrella company should be subject to PAYE.  This usually means that you do not need to submit a self assessment tax return to HMRC, depending on any other sources of income that you receive.  

Cons of an umbrella company

As an employee, contractors’ income is subject to employment taxes and NICs.  These costs should be factored into the assignment rate that is paid to the umbrella, and the umbrella also retains a margin for it’s services too.  

The umbrella will make those deductions from your assignment income, which usually means that you take home less money than you would as a sole trader or PSC.  Some umbrellas may not be entirely above-board, too…

Find out more about umbrellas here

Personal Service Company (PSC)

A personal service company, or PSC, is simply a limited company through which you provide your services.  

The PSC invoices your client for the work done, and your client pays for the invoice into the PSC business bank account. You then access income from the PSC bank account usually by a combination of employment income and dividends.  

Pros of a PSC

If you register as a PSC, then you can take advantage of the limited liability which means that your business is entirely separate from your personal assets.  

This means that if your business is sued then your house is not at risk.  Also, many clients prefer to engage individuals via PSCs rather than as a sole trader for the same limited liability reason. 

It also protects the client from an employment tribunal if you decide you are not genuinely self-employed, but more akin to a worker or employee – as a sole trader you could bring a case against your client but as a PSC you could only bring about a case against your own limited company. 

In addition, the PSC income is subject to business taxes (rather than personal taxes), and business expenses can be offset from your taxable profit. 

You will need to have a separate business bank account, and you will also need to have business insurance which often brings additional peace of mind to your clients.  

Finally, some people feel that operating through a limited company gives extra credibility and professionalism to the business.  

Cons of a PSC

The most significant drawback to operating through a PSC is the legal obligations that are part and parcel of being a director of a limited company.  

Although you can engage the services of an accountant, you remain legally responsible for the financial affairs of the business. This means that any errors in submissions to HMRC or Companies House are firmly your responsibility not that of your accountant.  

The responsibilities of running a limited company can be time consuming, and you will need to get to grips with business tax responsibilities such as corporation tax and VAT, as well as personal taxes in how you draw money from the company – usually a combination of salary and dividends.  

Of course, an accountant will be able to provide you with support in all of the aspects of running the business, but you should bear in mind they are only ever acting on an advisory basis, and that the responsibility remains with you.  

If you do engage an accountant, we recommend choosing one that has plenty of experience in advising PSCs as it is a different niche to standard business accounts.

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