Which one to Choose ?
The optionsavailable to you are:
- Your own LimitedCompany
- Sole Trader/Partnership
- Umbrella Company
- PAYE through theAgency
1. Your own Limited Company
The vast majorityof freelancers should work through their own Limited Company.
Company set-up canbe done on line or alternatively, you can apply for a limited company directfrom Companies House (but this will take longer).
Some accountantswill set up your company for free on condition that you sign up as a client. Ifyou’ve found an accountant you’re happy with, you may choose this option.
Setting up alimited company means that you are running your own business and will havecomplete control. You will be the company director, operate the company bankaccount, and be responsible for the affairs of the company. Running your ownlimited company is the most tax efficient way of working as you keep more ofyour income. Keeping complete financial and administrative control ensures yourmoney is not risked with any third party administrator. There are of coursemore responsibilities in terms of paperwork and deadlines, but a goodaccountant will be able to minimise this burden.
Companies House
As part of yourresponsibilities you need to notify Companies House of any changes to yourcompany. If you have formed your company through Freelance UK you can log in toyour admin section to perform many of these, such as change of registeredaddress or change of Directory/Secretary particulars. Alternatively you can dothis direct with Companies House through Webfiling. Their system will enableyou to file changes to your company information online, as a new user you willneed to apply for authentification codes first of all.
You will also needto complete an Annual Return. (This form comes from Companies House and asksfor details of directors, secretary, address, shareholdings and tradingactivities – completed once a year)
HMRC
Various forms willneed completing throughout the course of the year, all of which your accountantwill help you with. You can expect:
– Form CT41g (NewCompany enquiry form)
– VAT Returns(Assuming you are VAT registered you will get one of these every three months
-Corporation TaxReturn (This is the Company tax return and is sent with the Annual Accounts tothe Inland Revenue – prepared once a year by your accountant)
Choosing anAccountant
Freelance UKcarries many advertisements for accountants that specialise in catering forfreelancers. Our advice would be to approach as many as you can to establishwhat each offers, how they can save you money and the service they provide as acomparison.
2. Sole Trader/Partnership
These are bothforms of self employment. A partnership just means that two or more people ownthe business. These are the simplest ways in which you can trade. You areobliged to keep all your invoices and receipts for 6 years and keep a record ofthe money you have earned and the money you have spent for your business. Atthe end of the tax year (5th April) you need to complete a Personal Tax Returnon which you will declare to the Revenue these income and expenses.
To register as asole trader you need to complete a form SA303 which you can download here:
Or register withthe Inland Revenue over the phone on 08459 15 45 15 .
When you areself-employed, you’re responsible for paying your own self assessment tax andNational Insurance contributions. Keeping full and accurate records from thestart will make it easier to work these out. Broadly speaking, after your firstyear in business, the tax you have to pay will be based on your profits for theprevious tax year. A tax year runs from 6 April to 5 April. (But you must startpaying Class 2 National Insurance contributions as soon as you becomeself-employed. These are payable in addition to any Class 4 National Insurancecontributions which may be charged on your profits.)
So if SelfAssessment applies to you, you must send in a tax return each year showingdetails of your income, gains, reliefs and allowances. You can also work outyour own tax bill, although The Inland Revenue will do this for you if you sendin your return before 30 September. If you send it in after 30 September, theycan still work out what you owe, but we can’t guarantee to let you know by the31 January deadline. You can also file your tax return via the Internet.
Unless your incomeis very small we would recommend that you employ an accountant. Whilst they canbe expensive, a good accountant will end up saving you far more than they costyou.
3. UmbrellaCompany
Joining anumbrella means you become a PAYE (Pay As You Earn) employee of the umbrella.Your client or agent enters a contract with the umbrella for your services andyou enter into a contract with the umbrella. An umbrella company therefore providesa ready made invoicing vehicle for freelancers whilst also removing theadministrative duties normally associated with working in the form of aPersonal Service Company. The Umbrella Company normally issues invoices on thefreelancers behalf, collects payments from clients/agencies, calculates tax andN.I contributions and pays the freelancer their net pay direct to theirpersonal bank account. The benefits therefore are that it is very easy to use,you simply send in your timesheet and expense details and wait to be paid. Thedownside is that you won’t keep as much of your money with an umbrella asrunning a limited company and you are reliant on that company collecting yourmoney from the client or agent and then paying you.
Traditionally,Umbrella Companies were more expensive than running your own Limited Company,mainly because their charges included all the administration overheads, andthey tended not to offer the same tax advantages. With the introduction of IR35the tax disadvantages of Umbrella Companies have been reduced however.
Umbrella CompanyDispensations
A dispensation isa list of expenses that your umbrella company is not compelled to record on aP11D. Normally when expenses are paid to an employee a Company is required tocomplete a P11D. A dispensation means this is not necessary for umbrellacompanies for those expenses which it covers. All umbrella companies have dispensations. If you claim expenses you will need to keepreceipts – a dispensation means that your umbrella company does not have topresent receipts to the Inland Revenue, it does not mean that you don’t needthem as you may need to prove expenditure.
Providing umbrellacompanies follow Inland Revenue rules, all should provide you with the same”take home” pay – the only difference should be the fee they chargeyou.
Choosing anumbrella company
When researchingpotential umbrella companies you may wish to ask if there are any hidden costsor penalties for leaving the umbrella company so that you can compare serviceson a like-for-like basis. Read more on umbrella companies on our sister siteContractor UK.
4. PAYE throughthe Agency
Some agenciesallow you to become “PAYE” through their own payroll service.
This is the leasttax beneficial option available to a freelancer as you pay full tax andnational insurance (NI) contributions on all your earnings. In addition thisoption does not allow you to claim valid business expenses which would help toreduce your tax and NI liabilities.
The Geeky Frenchy 