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If you are hiring a contractor in the UK, the question almost always comes back to two routes: engage them through their own Personal Service Company (PSC), or hire them as an employee through an employer of record (EOR). The PSC route is the long-standing UK contractor model, where the worker invoices through their own limited company. The EOR route puts the same person on a UK employment contract without you needing to operate your own UK entity. The choice has tax, classification, and operational consequences that are easy to get wrong.
This article walks through what each model is, how IR35 changes the math, when each route is the right call, and how to switch from one to the other when the engagement deepens.
What a Personal Service Company Is
A Personal Service Company is a UK limited company set up by a single individual to sell their own services. The contractor is the sole director and shareholder. They invoice end clients through the PSC, draw a small salary plus dividends from the company, and pay corporation tax on profits. The arrangement has been popular for decades because it offered tax-efficient income (low salary plus dividends) and flexibility (multiple clients, project-based engagements).
The end client engages the PSC, not the individual. The contract is between two companies: yours and theirs. There is no employment relationship in name. The PSC handles its own bookkeeping, VAT, corporation tax, and dividend distribution.
What an EOR Is
An EOR is the legal employer of your worker in a country where you have no entity. In the UK context, an EOR signs a UK employment contract with the worker, runs PAYE payroll under the EOR’s own UK employer reference, deducts income tax and National Insurance, contributes employer NICs, manages auto-enrolment pension, handles statutory sick pay and maternity pay, and processes termination under UK employment law. An EOR removes the need to set up your own UK Ltd just to hire one or two people there.
You direct the work and pay the EOR a flat monthly fee per employee, plus the gross salary and the employer NICs. The worker is an employee with statutory holiday, statutory sick pay, parental leave, and the rest of the UK employment-law package.
IR35: The Rule That Changed The PSC Model
You cannot evaluate the PSC route without understanding IR35. The off-payroll working rules (commonly called IR35) require end clients to determine whether an engagement with a PSC is genuinely a business-to-business relationship or whether it is, in substance, employment dressed up as a contract. The factors HMRC looks at: control over how and when the work is done, mutuality of obligation, right of substitution, integration into the team, exclusivity, and financial risk borne by the worker.
If the engagement falls “outside IR35,” the PSC arrangement works as intended. The contractor invoices, draws a tax-efficient salary plus dividends, and the end client pays the gross invoice. If the engagement is “inside IR35,” the end client (since April 2021 for medium and large clients) must operate PAYE on the deemed employment payment. The contractor still operates through the PSC technically, but income tax and employee NICs are deducted at source as if they were on payroll, and the end client pays employer NICs on top.
The end client carries the determination obligation, the documentation obligation (Status Determination Statement), and the tax liability if they get it wrong. That has tilted many UK end clients away from PSC engagements for full-time work and toward EOR or umbrella arrangements where the IR35 question simply does not apply (because the worker is an employee).
Side-by-Side Comparison
The table below shows how the two routes compare on the dimensions that typically matter when finance, legal, and the hiring manager are deciding. Use it as a starting frame, not a final answer for your specific scenario.
| Dimension | PSC Engagement | Employer of Record |
|---|---|---|
| Worker classification | Independent contractor (B2B) | Employee |
| Legal structure | Contract between your company and the contractor’s PSC | Employment contract between EOR and worker |
| IR35 determination required | Yes, for medium and large end clients | No, the worker is an employee |
| Statutory benefits | None (PSC is the contractor’s company; they self-fund) | Holiday, statutory sick pay, parental leave, pension auto-enrolment |
| Pricing | Day rate to the PSC (commonly £350 to £900 in the UK) | Gross salary plus employer NICs plus £400 to £600 EOR fee per month |
| Termination process | End the contract with notice per the SOW | UK statutory notice plus any contractual notice |
| Tax risk if misclassified | Sits with end client (IR35 reform 2021) | Eliminated; worker is on PAYE |
| Best for | Defined-scope projects, genuinely independent specialists | Full-time roles, long-term hires, work that looks like employment |
Cost: How the Two Compares
A PSC engagement is priced as a day rate. The contractor sets a number that reflects their tax efficiency, business overhead, and absence of statutory benefits. UK day rates for skilled engineering work commonly fall between £350 and £900 depending on seniority and discipline. There is no employer NIC on top (the PSC pays its own employer NIC if it draws a salary; otherwise the contractor takes profit as dividends). There is no monthly platform fee from the contractor’s side, though you may pay an agency margin if you sourced through a recruiter.
An EOR engagement is priced on annual salary. For a UK engineer at the equivalent of £80,000 gross per year, employer NICs add around 13.8% above the secondary threshold, plus pension contributions, plus the EOR fee (often £400 to £600 per month). All-in cost can be 25% to 35% above the gross salary number. If the same person was on a PSC at £600 per day for 220 working days, day-rate revenue to the contractor would be £132,000, with no employer NIC for you and no statutory benefit costs. The headline gap looks large.
The math closes once you account for IR35. If the engagement falls inside IR35, the end client operates PAYE on the deemed payment and pays employer NICs on top. The contractor’s net income drops materially compared to outside-IR35 status. Many contractors raise their day rate to compensate, and some refuse the engagement at the original rate. At that point, an EOR employment offer at a fair gross salary can land at similar or lower total cost while removing the determination burden.
When a PSC Engagement is the Right Call
A PSC route fits when the engagement is genuinely outside IR35. Common signals: the work is a defined-scope project, not an open-ended team role. The contractor controls how and when the work happens. The contractor has multiple clients and is not exclusive to you. The contract has a real right of substitution that has been exercised or could be. The contractor supplies their own equipment and bears business risk (fixed-price work, indemnities, professional insurance).
Specialist consultants on short engagements, fractional advisors splitting time across many clients, and project-based delivery work (a single security audit, a focused product build, a strategy engagement) are typical PSC scenarios. The contractor wants the tax efficiency of dividend income; you want the flexibility to engage and disengage without statutory employment exposure.
When an EOR is the Right Call
An EOR fits when the role looks like employment. Full-time engineers building your core product alongside the in-house team. Country leads with revenue or operations targets. Customer success, sales, and product managers reporting into your org chart. Anyone you would have hired in your home country as an employee if they happened to live there. Long-running engagements (over twelve months at full-time hours) where IR35 outside-status is hard to defend honestly.
An EOR also fits when the contractor wants employment for their own reasons (mortgage applications, parental leave, sick pay, NHS top-up, equity participation), or when the worker is offered a meaningful role and wants the protections of an employment contract. The IR35 reform has made the EOR route more attractive for many UK roles that used to default to PSC.
How to Make the IR35 Determination
HMRC publishes a Check Employment Status for Tax (CEST) tool that walks through the factors. It is free, official, and the determination it produces is generally accepted by HMRC if your inputs are honest. Common practice is to run CEST early in any PSC engagement, document the result in a Status Determination Statement, share it with the contractor, and re-run it at any material change in working pattern.
If CEST returns “inside IR35,” the choice is to: operate PAYE on the deemed payment (and have the contractor either accept the lower net or raise the day rate), switch to an umbrella company (where the umbrella employs the contractor), or move to an EOR employment offer. Many UK end clients now default to the umbrella or EOR routes for any role that cannot stand up a defensible outside-IR35 determination, because the audit risk and the determination workload outweigh the tax efficiency of the PSC arrangement.
Switching From PSC to EOR Employee
The mechanics take two to four weeks. Agree the new gross salary, target bonus, equity if applicable, and benefits package. Onboard the worker through your EOR partner: ID, address, bank, NI number, P45 from the previous payroll if any. Set the start date, ideally aligned with the next monthly payroll cycle. End the PSC engagement with the contractually required notice (commonly 30 days, sometimes the SOW expiry). Settle any outstanding invoices.
A few things to watch. Do not let the work continue without a gap if the relationship was previously deemed outside IR35; HMRC may use that to argue the historical determination was wrong. Document the change of model clearly. If the contractor’s PSC has been their primary structure for years, advise them to seek their own accountant’s view on retained earnings, dividend timing, and PSC closure or dormancy.
Decision Framework
If you are deciding between the two for a specific UK hire, run through these questions:
- Is the engagement clearly outside IR35? A contractor arrangement is more defensible when the work has a defined scope, limited integration into the company, genuine substitution rights, multiple clients, and meaningful business risk carried by the contractor.
- Is the role full-time or fractional? Long-term full-time engagements with one client are generally harder to classify as independent contractor work, while fractional, project-based, or multi-client arrangements are easier to support.
- Does the worker expect employment-style protections? If the role includes expectations around paid leave, sick pay, parental benefits, equity, or other employee protections, employment is usually the more appropriate structure.
- Do you already have a UK entity? If yes, you can generally hire employees directly through local payroll. If not, an EOR can provide compliant UK employment without requiring incorporation.
The Bottom Line
A Personal Service Company is a contractor structure for genuinely independent professionals. An EOR is an employment route for full-time hires. They are not interchangeable. Since the 2021 IR35 reform, UK end clients carry the determination burden on PSC engagements, and the audit risk has pushed many roles that used to default to PSC into EOR or umbrella arrangements. Use a PSC engagement for clearly outside-IR35 project work. Use an EOR when the role is what you would call a job. Run the CEST check honestly, document the outcome, and let the answer drive the model.
Frequently Asked Questions
A Personal Service Company is a UK limited company set up by a single individual to sell their own services. The contractor is the sole director and shareholder, invoices end clients through the PSC, draws salary plus dividends, and pays corporation tax on profits. An EOR is the legal employer of your worker in the UK or any other country where you have no entity. The EOR signs an employment contract with the worker, runs PAYE payroll, deducts tax and NICs, and carries employer liability. PSC is a contractor structure. EOR is an employment route.
No. IR35 (the off-payroll working rules) applies to engagements with a Personal Service Company. The rules require the end client to determine whether the working arrangement is genuinely B2B or is in substance employment dressed up as a contract. If the engagement is through an EOR, the worker is already an employee on PAYE under the EOR's UK employer reference. There is no PSC in the chain, no determination to make, and no off-payroll deduction obligation. The IR35 framework simply does not apply to a true EOR employment arrangement.
The April 2021 IR35 reform shifted the determination burden and the tax-liability risk to medium and large end clients. Before 2021, the PSC itself decided IR35 status. After 2021, the end client has to issue a Status Determination Statement and operate PAYE if the engagement is inside IR35. The determination workload, the audit exposure, and the risk of a wrong call have made many UK end clients limit PSC engagements to clearly outside-IR35 project work. Long-running full-time roles that used to default to PSC have shifted to umbrella or EOR.
It depends on the IR35 status of the would-be PSC engagement. Outside IR35, a contractor at £600 per day for 220 working days bills £132,000, with no employer NICs and no statutory benefit costs for the end client. Inside IR35, the end client operates PAYE plus employer NICs on the deemed payment, which closes the gap. An EOR at the equivalent £80,000 gross annual salary lands at roughly 25% to 35% above gross once employer NICs, pension, and the EOR fee are included. For inside-IR35 roles the EOR is often comparable or cheaper.
HMRC publishes a free Check Employment Status for Tax tool (CEST). Walk through the questions honestly, focusing on control over the work, mutuality of obligation, right of substitution, integration into your team, exclusivity, and financial risk. Save the result, document the inputs, and issue a Status Determination Statement to the contractor (and to any agency in the chain). Re-run CEST whenever the working pattern changes materially. If the result is inside IR35, you can operate PAYE, move to an umbrella arrangement, or convert to an EOR employment offer.
Yes, and many UK end clients do this when an engagement evolves from project work to ongoing full-time delivery. Agree a new gross salary, target bonus, equity if applicable, and benefits. Onboard the worker through your EOR partner: ID, address, bank, NI number, and any P45. Set the start date around the next monthly payroll cycle. End the PSC engagement with the contractually required notice. Avoid a same-day transition with no gap on a previously outside-IR35 engagement; HMRC may use that pattern to challenge the historical determination.
A PSC is a limited company owned by the contractor. The contractor invoices end clients through the PSC and draws income from it. An umbrella company is a third-party employer that puts the contractor on its own PAYE payroll and invoices the end client (or the agency) for the contractor's time. The umbrella deducts income tax and NICs at source and pays the contractor a net wage. A PSC offers (when outside IR35) tax-efficient dividend income. An umbrella simplifies inside-IR35 engagements by putting the contractor onto employee-style payroll without a personal company.
Use a PSC engagement when the work is genuinely outside IR35: defined-scope projects, contractor controls how and when the work happens, multiple clients, real right of substitution, business risk on the contractor's side. Use an EOR when the role is full-time, long-running, integrated into your team, exclusive, and looks like employment. Specialist consultants on short engagements, fractional advisors, and project-based delivery are PSC scenarios. Engineers building your core product, sales and customer success roles, and country leads are EOR scenarios. The IR35 question usually answers itself once you describe the role honestly.
