If you are thinking of casting off from the shores of being permanently employed and heading into the potentially stormy, but nonetheless lucrative, waters of contracting or freelancing, then you need to consider how you will set up your new business so as to minimize your long term tax liabilities, while maximizing your income and making it simple for your clients to deal with you.
So, what are your options? You basically have two - set-up a limited company or utilize the services of a tax umbrella company. Setting up a limited company is the most tax efficient way to operate, and you can claim back all kinds of expenses (equipment, software, etc.). If you are only concerned with paying the least amount of taxes possible, then it is probably the best option for you.
The downside to setting up a limited company is the extra work involved. There is a lot more paperwork to fill in, and you will need to hire a lawyer and an account to look after your affairs, which can make the process quite costly. So, if you want to focus solely on your work, and to bring in as much income as possible, then using a tax umbrella company is the better option.
The way a tax umbrella company works is that, basically, you become their employee for payment and tax purposes. Now, the term employee is used in the loosest possible sense here, as they have no control over you whatsoever. In reality, they are actually working for you, as they will take care of all of your invoices, payments and tax contributions.
The tax umbrella company will pay you weekly, fortnightly or monthly (whichever you agree on when signing a contract with them), and the funds will show up in your chosen bank account, minus your tax contributions and the umbrella company's fees. The umbrella company should only take a set fee (again agreed on before you sign a contract), and not a percentage of your earnings.
When deciding which umbrella company to use, you need to carefully read what exactly they will do for you, and how much they will charge. Avoid getting caught up with claims about 'special dispensations' and 'exclusive tax breaks', as no umbrella company has any special agreement with the tax office. So, keep to the facts, namely, how much they charge, how often they will pay you, and what their level of experience is.
So, what are your options? You basically have two - set-up a limited company or utilize the services of a tax umbrella company. Setting up a limited company is the most tax efficient way to operate, and you can claim back all kinds of expenses (equipment, software, etc.). If you are only concerned with paying the least amount of taxes possible, then it is probably the best option for you.
The downside to setting up a limited company is the extra work involved. There is a lot more paperwork to fill in, and you will need to hire a lawyer and an account to look after your affairs, which can make the process quite costly. So, if you want to focus solely on your work, and to bring in as much income as possible, then using a tax umbrella company is the better option.
The way a tax umbrella company works is that, basically, you become their employee for payment and tax purposes. Now, the term employee is used in the loosest possible sense here, as they have no control over you whatsoever. In reality, they are actually working for you, as they will take care of all of your invoices, payments and tax contributions.
The tax umbrella company will pay you weekly, fortnightly or monthly (whichever you agree on when signing a contract with them), and the funds will show up in your chosen bank account, minus your tax contributions and the umbrella company's fees. The umbrella company should only take a set fee (again agreed on before you sign a contract), and not a percentage of your earnings.
When deciding which umbrella company to use, you need to carefully read what exactly they will do for you, and how much they will charge. Avoid getting caught up with claims about 'special dispensations' and 'exclusive tax breaks', as no umbrella company has any special agreement with the tax office. So, keep to the facts, namely, how much they charge, how often they will pay you, and what their level of experience is.
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