Why PSCs are Unsuitable for Healthcare Workers

As a recruiter, you may see healthcare workers who want to contract through their own Limited company, often called a Personal Service Company, or PSC. The expectation is that as the director and shareholder of a PSC they can take advantage of tax-planning opportunities, pay less tax, and increase their take-home pay. It’s difficult to argue with the sentiments, but this route is not suitable for most healthcare workers, and could put workers, recruiters and clients at considerable financial risk. In fact, most healthcare contractors would be better off with umbrella company employment, and in this article we’ll explain why.


PSCs are not suitable for everyone

The PSC route is best suited for higher-earning career contractors who are genuinely in business on their own account. These contractors are set up to build their brand and their company, they earn enough to take full advantage of the tax planning opportunities, they’re comfortable paying for high quality advice and with the responsibility of being a company director. Most importantly, they’re genuinely independent, which means they’re likely to fall outside the scope of IR35.


Most healthcare workers are inside IR35

IR35 is legislation designed to stop so called “disguised employees” getting a tax advantage by working through an intermediary, like a PSC.

If “caught by” or “inside” IR35, PAYE tax and National Insurance must be deducted from any fees paid to the contractor or their PSC. With no statutory definition of employment or self-employment, IR35 assessments are complex, and every case really is different, but broadly speaking:

  • If the end client has employees doing the same work as the contractor in the same way, it’s very likely that they’ll be inside IR35.
  • If the contractor is hired as extra resource and will fit into the client’s organisation like an employee would, it’s very likely that they’ll be inside IR35.

As you’ve probably guessed by now, in our experience the vast majority of healthcare workers are very clearly inside IR35.


Is IR35 new?

The legislation itself is more than 20 years old and the rules themselves have not changed, but it used to be up to the contractor to determine whether it applied to them and if they got it wrong the bill for unpaid tax and penalties was entirely their responsibility. Even though they were clearly working inside IR35, many healthcare workers either received bad advice or actively chose to take the risk.

Since 2017 in the Public Sector and 2021 in the Private Sector, IR35 determinations have been the end client’s responsibility, and unpaid tax and NICs can be recovered from the “fee payer” – which is usually the recruitment agency. As a result, several high-profile end clients and even some government departments have received enormous tax bills because they assessed IR35 incorrectly.


What’s the best option for a contractor who’s inside IR35?

If your contractor is inside IR35, trading through a PSC is unlikely to work for them as they’ll be funding their company from taxed income and end up taking home even less. Of the other commonly available options, most healthcare workers will be better off with umbrella company employment.


Why is umbrella company employment more suitable?

As the name suggests, in umbrella company employment the umbrella company employs the contractor, supplying their services to the recruitment agency or end client, and paying them as their employee. As the contractor is employed, PAYE tax and NICs are paid, and the question of “disguised employment” doesn’t arise.

Because they’re fully employed even between assignments, they’ll receive full employment rights including sick pay, holiday pay, access to a workplace pension and maternity / paternity pay.

From the recruiter’s point of view the worker’s employment is outsourced to specialist experts who will handle payroll, HR concerns and many other aspects of contractor management, freeing the recruiter to concentrate on their core business.


Is there a downside?

If your healthcare workers are currently contracting through PSCs, there are some things that you’ll need to consider when switching them to umbrella company employment.

The first is to confirm that they need to switch. In our experience very few healthcare workers are genuinely outside IR35, but if after following expert advice and best practice the end client is confident of their “outside” assessment, it may be safe to continue engaging the contractor through their PSC. This situation will be extremely rare, though, and each contractor must be assessed individually before proceeding on this basis.

If your healthcare workers have been incorrectly working as if they were outside IR35, the switch to umbrella will see them paying PAYE tax and National insurance for the first time, and this will reduce their take home pay unless the assignment rate is increased to take account of this. There’s never a good time to take a pay cut, and you’re likely to see some resistance from your contractors, but it really is the best option for all concerned.  

And finally, there is the choice of umbrella company to consider.


Vetting your umbrella partners

Where contractors are under financial pressure, for example when they’ve just been told they can’t use their PSC anymore, there’s an increased risk that they’ll be targeted by non-compliant umbrella companies who will promise a higher take home pay figure and use tax avoidance to achieve it. This is at least as risky for all concerned as operating IR35 incorrectly, and should be avoided at all costs.  

For this reason, we recommend using a “preferred supplier list” of vetted umbrella companies, rather than allowing your contractors to choose their own umbrella. You should ensure you vet potential umbrella partners for compliance, expertise and service levels, to protect your contractors and give them the best possible experience of working with you.