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    Types of Tax

    When you are considering becoming self-employed there are lots of things to consider. How will you handle your own time and win new business? Where will you work? And what will you do about your financial requirements? Tax is one of the key things you need to consider when thinking about becoming self-employed or a sole trader. Here we take a look at the different types of tax you will encounter when you work for yourself.

    1. Income Tax

    You need to pay tax on your income when you are self-employed, just as you pay tax on your income when you are employed. Your personal tax allowance is set at £11,000. Up until this level you will not need to pay any tax. After this you can expect to be taxed at a rate of 20 percent on your income up to the level of £32,000. After this you go into the higher band of tax and will pay 40 percent on your income up to the level of £150,000. Above this the tax rate is 45 percent.

    You fill out a tax self-assessment form every year and through this you will calculate your tax requirements. You will be required to pay your tax bill on time every year.

    It is important to realise that you will also need to make payments on account once you have started paying tax through the self-assessment system. You in effect make an advance payment for the tax you are expected to owe for the current year. There are two instalments of these payments on account, which are due in January and in July each year.

    1. National Insurance

    National Insurance Contributions (NICs) are paid depending on how much you earn. You will have to pay Class 2 NICs and also Class 4 NICs.

    1. VAT

    You must add VAT to your bills when you have a business which makes over £83,000 a year. Once you have this turnover the VAT is calculated on your profits. VAT can be difficult to sort out, and it is hard to know whether you are paying the right amount, according to central London accountants. Sometimes it can be better for you if you register for VAT even when your turnover is not that high, especially if you have business customers who can reclaim VAT that is charged to them.

    It is important to be very organised when it comes to handling your financial affairs as a sole trader. Keeping a separate bank account can be a good idea, as can making sure your paperwork is regularly reviewed by an accountant who can tell you if you are doing everything right in terms of tax.