Making sure that you meet your tax liabilities is something that you need to seriously consider and plan for before you start working as a freelancer or contractor. Failure to have a proper system in place could see you being hit with a big, unexpected, tax bill, and possibly even a fine too. As well as paying the right amount of taxes, you need to make sure that the system that you opt for does not make it difficult for your clients to pay you. Your choices are to set-up a limited company or to operate under what is called an tax umbrella company. Setting up a limited company, in which you are the director and only shareholder, is the most tax efficient way of working, and means that you can claim back a wider range of expenses, such as equipment and software costs. As you would expect though, there are lots of legalities and paperwork involved with setting up a limited company. There is the cost to factor in too; it is not a cheap thing to do. As well as paying to register the company, you will also have to pay for a solicitor and an accountant. If you would prefer to avoid the hassles involved, and to focus on simply making money, then a tax umbrella company is what you need. 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. You can be up and running with a tax umbrella company in just a few days. You just need to submit your personal and banking details to them and they will take care of all of the paperwork and legal technicalities for you. They will pay you fortnightly or monthly (depending on what you agree with them) directly into your bank account. The amount that you receive will be the total amount that your clients paid to the umbrella company, minus your tax contributions and the umbrella company’s fee.
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