It is somewhat surprising that Personal Service Companies (PSC) have not featured recently in the Advanced Tax exam and this topic is certainly due to come up in September 2021.
Individuals were setting up PSCs to invoice their employer to receive their income gross and then withdrew the funds via dividends to escape the PAYE.
Under IR-35, the PSC becomes responsible for paying the PAYE in the deemed salary. So, let’s say Bethany sets up a PSC that invoices the end client for £100,000.
The PSC incurs expenses of £10,000 and pays Bethany a salary of £20,000 and the employer’s NIC of £1,547. The PCS also paid Bethany a dividend of £60,000.
To compute the deemed salary, there is a statutory deduction of 5% for expenses. (£100,000 x 5% =£5,000).
In addition, as the PAYE was already paid on the salary of £20,000, we can deduct the salary as an expense and the associated NIC of £1,547. Note that the employer allowance is not available to companies that have a single employee.
100,000-5,000-20,000-1,547 = 73,453.
The 73,453 is inclusive of employer’s NIC at 13.8% so the deemed salary is 73,453 x 100/113.8 = £64,546
The PSC now has to pay PAYE on the £64,546 but Bethany can make a claim to treat the dividend of £60,000 as coming out of the deemed salary to avoid double taxation.
Tax is technical and I recommend you get a copy of Advanced Tax Condensed to help you. This uses accelerated learning techniques to quickly master the key information.