Selfemployment guide - Tiscali

Determining the operation's most cost-effective tax status, and the level of protection it might need from creditors, are the first issues to tackle when launching a one-person operation.

Most self-employed people declare themselves either a sole trader or a schedule D freelance, both of which are relatively tax-efficient because income tax is paid only on the amount of income remaining after all business outgoings are deducted.

The other option is to launch a limited company, which, as the name implies, will limit individuals' liability by preventing creditors from pursuing them personally for unpaid debts. Here we give six reasons why it might be better to opt for limited company status. Its drawback is a less generous tax status: national insurance contributions will be steeper and income tax is paid on the whole amount that is drawn from the business as a salary. Find out more about the advantages and disadvantages of a limited company.

And potential freelancers should beware of the IR35 regulations introduced by the Chancellor to close a loophole that once allowed individuals in employment to cut tax and national insurance payments by declaring themselves an independent contractor and then continue to provide almost exactly the same service to their former company. The regulations have removed the tax advantages and indeed overall payments are likely to rise.

Seven out of every ten people who launch their own business have never done so before, according to research by Barclays Bank, so it is vital to get good financial advice before giving up a regular job. Most people still use an accountant but, increasingly, people are turning to corporate lawyers instead. Either one should offer advice with business planning and tax efficiency.