There’s a lot to take into account when going down the path of self-employment. This includes the operational structure of your business and how you’ll pay tax, which seems like a whole other world when you’ve spent most of your career as an employee.
You may have seen the terms ‘sole trader’, ‘umbrella solution’ and ‘limited company’ floating around before, but which one is most suited to you? We’ve put together an overview on each, so you can easily choose which route to self-employment to take.
Sole Trader
It’s straightforward to get going as a sole trader. The set-up process consists of registering with HMRC, with minimal startup costs. You’ll also have complete control in terms of decision-making and how money is spent.
There’s less accountancy involved, too. You’ll have to submit a Self Assessment tax return, but the likes of corporation tax won’t be a concern.
Bear in mind, the sole trader route does have one considerable disadvantage. You’re not legally separate from the business, so if it makes a loss, your personal assets are at risk.
Umbrella Company
With this option, the tax return isn’t a bother as you’re technically an employee of the umbrella company. The organisation handles all the payslip deductions like an ordinary employer would, so you won’t have to do any calculations or worry about putting money aside to pay tax later on. However, this does mean you relinquish an element of financial control.
The umbrella solution is a particularly good choice if you’re unsure how long you’ll be self-employed for. In some cases, you might be hired for a short-term project, for example.
Limited Company
The limited company route involves more accountancy admin – with corporation tax and dividends requiring consideration. But there’s also the opportunity to make significant tax savings, especially as you can generally claim more expenses by selecting this option.
A limited company does present the potential issue of IR35 legislation, especially with the recent public sector and planned private sector reforms. Your personal assets won’t be at risk with this route, as any business losses will be liable to the company. It’s also a good option if you ever want to easily switch from contractor to business owner.
Each route has its advantages and disadvantages, but whichever option you choose, it pays to have an expert on hand to help with the financial side of things.
Bright Ideas are here to offer you all the support you need. You can book in a FREE consultation with our team by calling 0161 669 4221 or sending an email over to info@biaccountancy.com.
