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Tax advice for start-up businesses

Paying tax when you’re self-employed can seem confusing, but you can’t afford to get it wrong. Read on to make sure you don’t make mistakes.

Starting your own business is such a busy time that it can be easy to forget some of the paperwork you need to do. But while filling out forms might not seem as exciting as designing your social media strategy, it’s essential in order to avoid fines or other problems that could seriously affect your business down the line.

Registering your business

All businesses need to pay tax, but which types depends on the structure of your business. When you first start out you are likely to be a sole trader if you’re working on your own, a partnership if you’re setting up a business with one or two other people, or a limited company if you’re a bigger operation planning on directly employing other people. Take a look at our article Different types of business explained for more information about this, and seek advice from HMRC if you’re not sure what type of business you should run. Limited companies must also register with Companies House.

A limited company's tax affairs are more complicated, so the information below applies to sole traders and partnerships only.

No matter what type of business it is, you will need to register with HMRC to pay your tax. You can find the forms you need to fill in and help to guide you through the process online. You must do this as soon as possible or you could face a fine. 

Keeping records

In order to work out how much tax you owe, you will need to keep records of the total amount of money your business makes – known as your turnover - and how much you spend. This will include bank statements and copies of invoices for sales you have made to prove your income, and receipts for stock, paying contractors and other costs related to your business that make your outgoings. You can claim a proportion of your electricity, telephone and other bills if you are working from home, as well as things like travel if it is directly related to your business. The HMRC website has a list of allowable expenses explaining what you can claim.

How you keep your records is up to you, but they need to be up-to-date and accurate in case HMRC decide to check them, and you’ll face a fine if you haven’t kept them properly. Free financial management software is available to make this easier.

Filling in a tax return

You will need to fill in a self-assessment tax return for each financial year, which runs from April 6 to April 5. This can be done online, and needs to be completed by the end of January following that year i.e tax returns for the tax year ending April 5 2013 need to be completed by January 31 2014.

Your tax return asks for a lot of details about your business, including your annual turnover. You then deduct all the expenses you have recorded from this amount to give your profit, which is the amount of money you’ll be taxed on. You won’t pay any income tax if you have made a loss. People in partnerships will also need to fill out a form which shows each partner’s personal share of the profits or loss.

If you’re a small business with a small turnover, you might be able to fill in your tax return yourself. If you’re dealing with a bigger turnover – or don’t trust yourself with maths! – it might be worth hiring an accountant to do it to avoid any mistakes that might cost you a fine. 

Paying your bill

Your tax bill will be calculated instantly when you submit your tax return online. You might be surprised by how big your tax bill is, but that’s because it will include National Insurance contributions and any Student Loan repayments you are liable for on top of your income tax.

Your tax bill will also include a payment on account if your turnover is above a certain amount. A payment on account is where you pay part of next year’s tax bill in advance. For example, if you owe tax of £5,000 on the profits in your first year of trading, your tax bill might actually be closer to £7,500 as you’ll be paying 50% of your expected profits for the following year as well. This can be confusing, and can really catch small businesses out in their first year when they receive a much bigger bill than expected. In following years, the total tax bill will be less as a proportion of your profit, because unlike in the first year you’ll have paid some of the tax in advance. Your tax is paid in two instalments, one due on January 31 and one due on July 31, although you will normally only make one payment on January 31 if you don’t owe any payments on account.

Things to remember

  • You need to budget for your tax bill every year, because HMRC won’t take excuses if you haven’t got the money. A big tax bill can cause serious cash flow problems for businesses that haven’t planned for it, so it could be worth opening a new bank account and saving money for your tax bill in there.
  • Opening a business bank account will make it much easier to keep records than having to track your business’ income and costs going in and out alongside other money in your personal bank account.
  • If you’re working at another part-time job while running a business, you’ll pay tax on your combined earnings from both, which you’ll need to fill in on your tax return. However, any tax you’ve already paid through PAYE in your other job will be deducted from your final bill for that year.

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