If you're starting up a business, one of the first questions you'll need to answer relates to your corporate structure. Do you want to operate as a sole trader? A limited liability partnership (LLP) or a limited company? What's the difference? Why does it matter?
The majority of the pros and cons of each are related to tax, and the associated administrative complexity. Limited companies have more reporting requirements: you will need annual accounts, corporation tax returns, potentially VAT registration (and then VAT returns)... the list goes on. For sole traders the main thing your accountant is likely to do is your self-assessment tax return which is pretty straightforward in comparison. The tax question in general (like all tax questions) is a massive one, with loads of tangents, loopholes & exceptions. As ever, your personal circumstances are crucial. If, for example, you're a higher rate tax payer (earning over £45k per annum) some of your income will be taxed at 40% - so for every £1 you earn, HMRC take 40p from you. A limited company will pay 19% on profits in corporation tax (i.e. after business expenses have been deducted). So it can make a lot of sense to use a limited company if you're self employed or have multiple jobs, and are lucky enough to be earning a high wage.
In the past, a lot of people were "self-employed" through a limited company to save themselves the income tax, and make the most of tax rules applying to businesses. These companies are known as "personal service companies". Employees in all but name, these individuals would work for just one employer, in one specific role with specific responsibilities, but would be off payroll. Over the past couple of years, HMRC have strengthened the rules (called intermediary regulations or IR35 for short) around this and are now much less forgiving than they have been in the past. Public sector organisations are now required to determine whether IR35 applies to a relationship, though if you're working in the private sector you can still determine this for yourself.
So, if you are working for a client through a limited company you need to think about the genuine substance of your arrangement. Do you hold a titled role with associated responsibilities? Do you manage staff? Could you send someone else of equivalent experience in your stead without upsetting anyone? This last point is known as being able to provide a "substitute" and I find it's the easiest one to make a decision on. HMRC provide an online tool to help you determine whether your work is "in scope" for IR35. If it is, you will be taxed at source as if you are an employee even if you are invoicing through a limited company.
So look carefully at your contract and think about your actual role to make sure you're not an "employee in disguise". If you're audited and HMRC think you're operating as employee, you could be liable for a backlog of tax and NI contributions, plus interest. If you look like, smell like and act like an employee, you're probably an employee so far as HMRC are concerned.