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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. 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.

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. Deciding which tax umbrella company to use can be a bit of tricky process, as some of the less reputable ones try to charge you a percentage of your earnings, or make claims that are false. One false claim, which is unfortunately not that uncommon, is that if you sign up with a particular company they will give you 'special dispensations', implying that you can claim more expenses by using their services; however, as any accountant will tell you, these claims are untrue, and expenses are either allowed or disallowed according to taxation laws, and not at the discretion of the company that you use to calculate your payroll.
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