Starting a Business: Tax Essentials

Tell HMRC You’re Self-Employed

Your first obligation is to register with HMRC by 5 October after the end of the tax year you started trading. You can do this online at gov.uk — it takes about 10 minutes.^[3]

Choose Your Business Structure

Most people start as a sole trader — it’s the simplest and cheapest option. You can always incorporate later if it makes sense. The main options are:^[1]

Sole trader — simplest, you and the business are one legal entity
Partnership — if you’re going into business with someone else
Limited company — separate legal entity, more admin but potential tax benefits at higher profits

Start Keeping Records from Day One

You must keep records of all business income and expenses from the moment you start trading:^[4]

All sales and income (invoices, receipts)
All business expenses (receipts, bank statements)
Bank transactions — ideally in a separate business bank account

Understand Your Tax Obligations

As a self-employed person, you’ll pay:^[2]

Income Tax on your profits (after deducting allowable expenses)
National Insurance — Class 2 (£3.65/week) and Class 4 (6% on profits £12,570–£50,270)
VAT — only if your turnover exceeds £90,000 (the registration threshold)^[5]

Set Aside Money for Tax

Unlike employment, no one deducts tax for you. A good rule of thumb is to set aside 25–30% of your profit for Income Tax and National Insurance. Put it in a separate savings account so it’s there when the bill arrives.

First-year tip: You won’t pay your first tax bill until 31 January following the end of your first tax year. That means you could be trading for up to 22 months before your first payment is due. Don’t let that lull you — the bill will come, and it may include payments on account for the following year too.

Pre-Trading Expenses

You can claim expenses incurred up to 7 years before you started trading, as long as they would have been allowable if incurred during trading. This includes market research, training, equipment, and professional fees.^[2]

Business Bank Account

A separate bank account isn’t legally required for sole traders, but it’s strongly recommended. It makes record keeping much simpler and keeps your business and personal transactions separate.^[4]

MTD and New Businesses

If your qualifying income (self-employment plus property) exceeds the MTD threshold from the start, you may need to use Making Tax Digital from your first year of trading. Check the current threshold and mandation dates. You’ll need MTD-compatible software to keep digital records and send quarterly updates.

Frequently Asked Questions

What tax do I pay when starting a business?

As a self-employed sole trader, you pay Income Tax on your profits (20–45%), Class 2 NI (£3.65/week), and Class 4 NI (6% on profits between £12,570 and £50,270). VAT only applies if turnover exceeds £90,000.

How soon do I need to register with HMRC when I start a business?

You must register by 5 October after the end of the tax year you started trading. However, it is best to register straight away as it is free and takes about 10 minutes online.

Can I claim expenses from before I started my business?

Yes. You can claim pre-trading expenses incurred up to 7 years before you started trading, provided they would have been allowable if incurred during trading. This includes market research, training, and equipment.

How much should I set aside for tax as a new business?

A good rule of thumb is to set aside 25–30% of your profit for Income Tax and National Insurance. Keep it in a separate savings account so it is available when your bill arrives.

Sources

Set up as a sole trader — GOV.UK
Working for yourself — GOV.UK
Register for Self Assessment — GOV.UK
Business records if you're self-employed — GOV.UK
VAT registration — GOV.UK

Starting a Business: Your Tax Obligations