If by this step contracting is still on the cards for you, then how you set yourself up needs to be considered.
Sole Trader
Depending on how you get your contracts you may decide to keep it simple and become a sole trader. You will register with HMRC as self employed and pay National Insurance Contributions and income tax on the profits you make. Your Self-Assessment Tax Return will need to be submitted annually. You may also need to register for VAT if your earnings are in excess of £85,000. A sole trader is not a separate entity and you will be personally liable for business debts. If you obtain work via a recruitment agency then this option will not be available to you as payments to you cannot be made gross.
Limited Company
If your horizons are long term and you want to grow into a bona fide business then Limited Company will be a good option to consider. This is a separate legal entity with a director (you) who is responsible for the good running of the company including the payment of taxes, submitting annual statutory returns and maintaining financial records. Your earnings will be taken as dividends from the profits of the company. You will have the option to organise your company’s affairs and manage expenses. There is quite a lot of responsibility and organisation relating to a limited company and many contractors engage specialised accountants who are well positioned to assist the contractor to work as tax-efficiently as possible.
Umbrella Company
An umbrella company is an entity that has an employment contract with the contractor. Their principal function is to ensure the contractor has a payroll facility which is flexible enough to take payment from multiple sources e.g. multiple agencies and end clients. This gives the contractor considerable freedom in who they work with. Apart from raising a timesheet much of the administration for raising invoices, collecting payment, calculating and paying away taxes is undertaken by the umbrella company who liaises with the recruitment company and if necessary the end client. Umbrella companies are a viable option if you want to try out contracting or don’t see it as a long term career. Relatively cheap and administration-friendly they can get you on to the contracting road quickly and efficiently.