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Tax obligations for sole traders

If you set yourself up as a sole trader, you need to be careful to meet your tax obligations. Here are the main steps you need to take to ensure that you declare your earnings in the right way and pay the correct amount of tax:

The first step is to work out whether you are better off as a sole trader or registering as a limited company. This is important, because it has a big impact on how you are taxed. You can get the information you need to make this decision from the HMRC website, or an accountant.

You need to register as a sole trader with HMRC. Many people think you should wait until you make your first sale to register. In fact, you should register as soon as you have anything in place and set out to find work.

At the same time, you need to register to pay National Insurance contributions. What type of contributions you pay, and how much, depends on your income.

Sole traders are taxed under the self-assessment system. To make sure you can fill out the self-assessment form correctly, you need to keep good records. That means keeping receipts of business expenses and records of the work you do and the invoices you issue.

The first tax year, you pay your tax at the end of the year. After that, you have to make payments on account. This effectively means that you are paying part of your tax in advance. How much you pay is based on your earnings from the previous year. If you believe your earnings for the new tax year will be lower than the previous year, you can ask HMRC to let you pay less tax on account.

If you have turnover above the VAT threshold, you will need to be VAT registered and pay that tax too. This means you will need to keep VAT records.

Posted by Louise
October 31, 2014

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