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Tax for the self-employed Other taxes the self-employed pay

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Make sure you have a solid business plan

As well as income tax on your profits, you may also have to pay the following taxes.

National Insurance

Class 2 contributions (£2.40 a week in 2010-11) help you qualify for state benefits.

You may also have to pay Class 4 contributions on any profits over £5,715 in 2010-11. For details, see our National Insurance guide.

You also pay employers’ Class 1 contributions if you have staff.

Business rates

If you use premises such as a shop or office, or in some cases where you use part of your home for business.

Capital gains tax (CGT)

This may be due if you sell your business or if you sell your home and part of it has been used exclusively for business.

HMRC makes a distinction between using a home ‘solely’ for business and ‘exclusively’ for business.

CGT becomes due when you sell your home only when part has been used ‘exclusively’ for business, not ‘solely’.

See the Which? guide to capital gains tax for more.

Solely vs exclusively

Broadly, if your home is used ‘solely’ for business it means that part of your home is used purely for business, but only part of the time.

‘Exclusively’ means part of your home is set aside for business at all times.

If part of your home is used ‘exclusively’ for business then broadly you can claim costs as a proportion of the area of your home which is used for business.

However, if part of your home is used ‘solely’ for business, you have to apportion by area and amount of time.

So essentially you choose between claiming less in expenses now but no CGT (not exclusive use), or more in expenses now, but the risk of some CGT (exclusive use).

Value added tax

You will have to pay or reclaim this quarterly if your sales are over £70,000 in 2009-10. 

Up to this you can register voluntarily, which may be worthwhile if you can claim a lot of VAT on things bought for your business. 

If you’re not registered

If you are not registered for tax you cannot reclaim VAT on things you buy for your business, but you should use prices including VAT when you are recording expenses and allowances so you get tax relief on the VAT.

If you are registered

If you are registered for VAT you must charge it on all goods and services you supply which incur VAT. There are a few exceptions, such as free services and one-off free gifts worth less than £50.

Flat rate VAT scheme

If your turnover is less than £150,000 it could be worth considering the flat-rate scheme. The scheme simplifies your VAT accounting by calculating your VAT payments as a percentage of your VAT-inclusive turnover. It can be good value for small businesses and reduces admin. 

For more see HMRC's flat-rate VAT information.

 For a complete guide to being self-employed, including guidance on tax, national insurance and VAT responsibilities, buy Working for Yourself by Mike Pywell and Bill Hilton.