Newly Self-Employed? 10 Decisions That Can Affect Your Tax for Next Two Years

Starting your own business is exciting, but your first year can also bring a lot of things you have never had to deal with before. You now have to keep track of your income, record your expenses and make sure you understand what you will owe in tax. Some decisions you make in the first few months can also affect what happens in your second year. This is why getting your tax arrangements right from the start is essential.

You do not need to become a tax expert overnight. You simply need to understand the decisions that can make a difference to your future tax bills and cash flow. Here are ten areas you must think about when you are newly self-employed.

What Choice in Your First Year of Self-Employment Could Affect Your Future Tax Bills

1. When You Start Trading

The date you actually start trading matters. It can affect which tax year your income belongs to and when you need to register for Self Assessment. You might have spent weeks preparing your business before making your first sale, but preparation and actually starting to trade are not always the same thing.

Keep a clear record of when you started trading and your first business income. If you are unsure about your trading date or registration requirements, it is better to check early rather than trying to work it out just before your return is due.

2. How You Keep Your Records

Good records can make your first tax return much easier. More importantly, they give you a clearer idea of how much your business is actually making and how much money you should keep aside for tax. You should have a simple system for recording:

1. Business income and payments received
2. Business expenses and receipts
3. Invoices you send to customers
4. Bank transactions
5. Equipment and other business purchases

You do not need a complicated system if your business is small. What matters is that your records are accurate, organised and kept up to date throughout the year.

3. Whether You Separate Business Money

Using one bank account for everything can make your finances difficult to follow. A separate business account can make it much easier to see what money belongs to your business and what you are spending personally.

This is especially helpful when you start having more customers and expenses. You can check your business income at a glance and match payments to your invoices without going through every personal transaction. It also makes preparing your tax records much less stressful.

4. Which Expenses You Claim

Your expenses can affect the amount of profit you pay tax on, so you should understand what you can legitimately claim. This could include certain business equipment, professional services, office costs, travel and other expenses depending on how your business operates.

Do not assume that every purchase connected to your work is automatically an allowable expense. Some costs have specific rules, particularly when something is used for both business and personal purposes. Keep the receipt and a clear note of what the expense was for so you can check it properly when preparing your return.

5. How You Deal With Your First Tax Bill

Your first tax bill can be larger than your expectation. This is partly because you may have to pay the tax due for your first year and, if you meet the conditions, make payments on account towards the following year’s tax.

That can put pressure on your finances if you have spent most of your business income. Before your first return is due, try to work out what you may need to pay and keep money aside throughout the year. If you need tax services for newly self employed, getting advice before your first bill arrives can also help you understand what to expect.

6. How You Handle Payments on Account

Payments on account are advance payments towards your next Self Assessment bill. They are normally made in two instalments, one by 31 January and the other by 31 July, where the rules require them. This is one of the biggest changes for someone who has moved from employment to self-employment. When you were employed, your employer usually dealt with PAYE deductions for you. Now, you need to plan for these payments yourself, and the amount you put aside can make a big difference to your cash flow in the second year.

7. What You Do With Your First Year’s Profit

It can be tempting to treat every pound that comes into your business as money you can spend. But your turnover is not the same as your profit, and your profit is not the same as the amount you can safely take home. Once you have paid your business costs, you still need to think about tax and other future expenses. Try to build a habit of keeping part of your business money aside rather than waiting until the tax deadline is close. This simple decision can make your second year much easier financially.

8. Whether You Buy Equipment Early

You may need a laptop, tools, furniture, software or other equipment when you start your business. The timing of these purchases can sometimes affect your tax position, so do not make a large purchase simply because you think it will reduce your tax bill. Think first about whether the item is genuinely needed for the business and whether you can afford it. Keep the invoice and purchase details, particularly for more expensive equipment. If you are unsure how a purchase should be treated for tax, check before making a major spending decision.

9. What You Do If Your Income Changes

Your first year may not look anything like your second year. You might start slowly and then gain several large clients, or you could have an unusually profitable first year followed by a quieter period. Keep an eye on your figures as the year progresses. If your income is falling or rising significantly, this can affect how much tax you ultimately owe and how you plan for payments on account. Looking at your numbers regularly gives you time to adjust instead of discovering a problem after the tax year has ended.

10. When You Get Professional Advice

You do not have to wait until your first tax return is due before asking for help. In fact, getting advice early can help you avoid mistakes that become harder to correct later. A tax adviser can help you understand your responsibilities, organise your records and plan for upcoming payments. This can be particularly useful if you have income from employment as well as self-employment, work from home, employ other people or have more complicated financial arrangements.

Start Well

Your first year of self-employment sets the pattern for what comes next. You will probably learn a lot as your business grows. The important thing is to make sensible decisions early, review your position regularly and ask for help when something is unclear. A little planning in year one can save you money, time and stress in year two.