Self employed seems an attractive option for contractors. You can register online as a sole trader, select your own accounting period and you don't have to pay tax on your earnings straight away. Plus you can offset expenses against your taxable income. However being a self employed contractor comes with an administrative burden which should not be underestimated, and in reality the options for reducing your tax bill are relatively poor. You can compare your take home income with our free Self Employed vs Limited Company Tax Calculator

Basic requirements for self employed

- no tax or national insurance deducted at source (you need to set this aside to pay to the HMRC)
- must fill in annual Self Assessment Tax Return
- Your first tax and national insurance is due at the end of January following your year of assessment. This can mean you have a period of up to 20 months before your first tax payment is due. For example if you file your return in April 2014 then your total tax payment would be due end of January 2015. Obviously you do need to keep the tax money ready to pay - but there is no reason you couldn't put it in an interest bearing account. After your first tax return you will be assessed for "payments to account" which means the HMRC calculate your earnings over the previous year and get you to pay installments on the tax that would be due. As with all tax payments if you are late then you will be hit with penalties and interest.
- You must register for VAT if your turnover goes above £77,000.
- Strongly recommended to get an accountant to help you structure your affairs.

Positives with self employed vs Limited Company

- No Company accounts, Corporation Tax or Annual Returns
- Tax effective if you earn less than the higher rate tax threshold

Negatives with self employed vs Limited Company

- Cannot hold profits and distribute them later
- No protection of personal assets
- Administrative burden is fairly similar

The main thing to be aware of with going self employed is your tax obligations are strictly observed. "those who are self-employed... face a challenging tax maze that could land them in hot water should they get it wrong," says Chas Roy-Chowdhury, head of taxation at the Association of Certified Chartered Accountants.