When deciding to become self-employed, there’s a lot to take account. This includes things such as the operational structure of your business and how you’ll pay tax. These are things that can seem brand new when you’ve spent most of your career being an employee.
Three terms you may have seen during your research for self-employment are ‘sole trader,’ ‘umbrella solution’ and ‘limited company.’ Do you know which one would suit you and your business the most?
Below we have put together descriptions of all three in the hope it can help you choose which route you should take to being self-employed.
The most straightforward way to get started is as a sole trader. This process will require you to register with HMRC and has minimal startup costs. This method will also give you complete control in terms of how money is spent and with any decision making.
All you’ll have to do is submit a Self Assessment tax return so there is less accountancy involved too. Corporation tax won’t be an issue.
Becoming a sole trader does have one, quite significant disadvantage. By law you’re not separated from the business, so if it makes a loss, your personal assets will be at risk too.
The tax return isn’t a concern with this method as you are technically an employee of the umbrella company. Any payslip deductions are handled by the organisation just like an ordinary employer, so you won’t have to worry about putting money aside to pay tax later or do any calculations.
This does mean however that you relinquish an element of financial control.
If you’re unsure about how long you’re going to be self-employed for, then the umbrella solution will be a great choice. For example, you could be hired for a short-term project in which you’d be classed as self-employed.
This route requires much more accountancy admin. Corporation tax and dividends will all need to be taken into consideration. However, you can claim more expenses with this option so there will be an opportunity to make great tax savings.
A limited company has the potential issue of IR35 legislation, especially with planned reforms to the private sector and new reforms already in place to the public sector. All potential business losses will be liable to the company so your personal assets will always be safe if anything were to happen. If you want to change from contractor to business owner, this is a great option to take.
Each route has its advantages and disadvantages depending on what type of self-employment you’re looking for. If you need assistance deciding what would be the best route for you then please call our Milton Keynes accountants on 01908 046964 or request a free call back.