For education agencies, understanding compliance is serious. With supply teachers increasingly being engaged through umbrella companies, one common question arises: Can supply teachers use Personal Service Companies (PSCs)?
The short answer is no.
The complexities of tax law and recent legislative changes, including IR35 reforms, make it clear that PSCs are not a suitable or compliant option for most supply teachers.
Read on to find out why this is the case and what alternatives agencies and teachers should consider.
What is a personal service company (PSC)?
A personal service company (PSC) is a limited company typically set up by an individual contractor to provide their services to clients.
PSCs have been popular among contractors in sectors like IT or engineering, where projects are genuinely self-employed arrangements. Through a PSC, an individual can pay themselves in a tax-efficient way, often combining a low salary with dividends.
For supply teachers, however, this is not the case. The nature of their work doesn’t align with the requirements for operating through a PSC, making it an unviable option.
Why can’t supply teachers use PSCs?
Several factors make PSCs incompatible with supply teaching roles:
1. IR35 legislation
IR35, or the off-payroll working rules, is designed to prevent “disguised employment.” This occurs when an individual operates as a contractor through a PSC but, in practice, is working like an employee.
Most supply teaching roles fall squarely within IR35 because:
- Teachers are under the supervision, direction, and control (SDC) of the school.
- They typically use school-provided materials and follow the school’s schedule.
- Their work is integral to the school’s operations.
HMRC would view supply teachers as employees of the school or agency for tax purposes, making it non-compliant for them to operate through a PSC.
2. Agency legislation
The agency legislation further complicates the use of PSCs. This legislation dictates that if a worker is supplied by an agency and is under SDC, they must be taxed under PAYE, regardless of whether they use a PSC.
For supply teachers, this means agencies are legally required to deduct Income Tax and National Insurance Contributions (NICs) at source. A PSC cannot offer a compliant alternative to this PAYE arrangement.
3. School expectations and compliance requirements
Schools are under increasing pressure to demonstrate compliance across their supply chain. Engaging teachers via PSCs raises compliance risks for schools, particularly if HMRC audits their supply arrangements. As a result, most schools explicitly require supply teachers to be paid through PAYE-compliant channels, such as umbrella companies or agency payroll.
4. Lack of business-to-business services
PSCs are appropriate for contractors who provide services on a business-to-business basis, typically for project-based work. Supply teachers, however, don’t provide services as independent businesses. Their roles involve filling staffing gaps rather than delivering standalone projects, further disqualifying them from using PSCs.
What’s the alternative?
If PSCs are off the table, what’s the best solution for supply teachers? The answer lies in PAYE payroll options:
- Agency payroll
Agencies can pay supply teachers directly through their payroll, deducting tax and NICs at source. While straightforward, this option often comes with fewer perks compared to umbrella companies.
- Umbrella companies
Umbrella companies provide a compliant and flexible payroll solution for supply teachers. They handle all tax and NIC deductions under PAYE while offering additional benefits, such as:
- Statutory employment rights (e.g., holiday pay, sick pay).
- Simplified payroll processing.
- Access to perks like employee benefits, pensions or insurance schemes.
Importantly, umbrella companies ensure full compliance with tax laws and protect teachers and agencies from HMRC scrutiny.
What are the risks of non-compliance?
Attempting to engage supply teachers through a PSC not only puts the teacher at risk but also exposes agencies and schools to significant penalties, including:
- Financial penalties: HMRC can pursue unpaid taxes, interest, and fines.
- Reputational damage: Non-compliance can harm your agency’s credibility with schools and teachers.
- Legal liability: Under IR35 or the Criminal Finances Act, agencies could face prosecution for facilitating non-compliant arrangements.
Educating supply teachers on compliance
Education agencies play a vital role in guiding supply teachers toward compliant payroll arrangements. Transparency and education are key:
- Explain the risks: Make it clear why PSCs are not suitable and highlight the benefits of PAYE solutions.
- Provide guidance: Recommend trusted umbrella companies that specialise in education sector payroll.
- Support their transition: Help supply teachers understand the practical steps for engaging with an umbrella company or agency payroll.
To sum up
Supply teachers cannot use PSCs, and attempting to do so is a non-compliant and high-risk strategy. Agencies must ensure all payroll arrangements adhere to IR35, agency legislation, and HMRC’s guidelines.
Partnering with a trusted umbrella company can help education agencies provide supply teachers with a compliant, efficient, and stress-free payroll solution.
If you’re unsure about your current payroll setup or need support in educating your supply teachers on compliance, get in touch with us today. We’re here to help you build a compliant, trusted, and successful agency.