Whichever invoicing method you use you will be liable to pay income tax on all money you receive. If you use an Umbrella Company or an Agency on a PAYE basis then they will deduct the necessary amounts from your earnings before paying you. 

For those using a Limited Company/Personal Service Company you will receive your earnings gross (i.e. including tax and NI) and it is your company’s responsibility for you to deduct and pay the necessary tax.

Assuming you will reach the higher rate (40%) tax band with your combined income from the company, you will have to fill out a self assessment form for income received in each tax year. The Inland Revenue use the details on this form to calculate whether you need to pay any additional tax.  Any tax owed is payable by 31st January of the following year.  The tax year goes from the 6th April to the 5th April of the following year.

Most contractors pay an accountant to fill out their self assessment form.  The normal charge for this is £50 to £150 per year depending on how complex your financial affairs are.   Some accountants and Umbrella Companies include this within their services.

If you are running your own Limited Company/Personal Service Company then the Inland Revenue has also introduced 'payments on account' which you should be aware of. If you owe £5,000 in tax for the previous year, you will also have to pay the same amount again (in advance) - i.e. £5,000 + £2,500 in January, then the remaining £2,500 in June.

If you are running your own Personal Service Company and are caught by the IR35 rules, your income will be in the form of a 'deemed salary' after deductions for expenses and National Insurance.

As a Parasol employee all tax calculations are done at source (e.g. when the payment is made) and therefore the complexities of dividends and payments on account are removed. You may still need to complete a Self Assessment return (usually online) and Parasol can help with explaining how this process works.