Tax When Starting a Business

Key facts

You must register with HMRC by 5 October following the tax year you start trading.
Sole traders register for Self Assessment; companies register for Corporation Tax within 3 months.
You can claim pre-trading expenses incurred up to 7 years before the business starts.
Opening year loss relief lets new businesses carry losses back 3 years against all income.
The Annual Investment Allowance gives 100% relief on equipment purchased from day one.

Tax Registrations: What You Need

Business Type	Registration	Deadline
Sole trader	Self Assessment with HMRC	5 October after the tax year you start^[1]
Partnership	Partnership SA + individual SA	5 October after the tax year you start
Limited company	Companies House + Corporation Tax	Within 3 months of starting to trade^[4]
VAT (compulsory)	HMRC VAT registration	Within 30 days of exceeding £90,000
Employer (PAYE)	HMRC PAYE scheme	Before first payday

First-Year Tax Planning

Pre-Trading Expenses

Expenses incurred up to 7 years before you start trading can be claimed as if they were incurred on day one. Common pre-trading expenses include:^[3]

Market research and feasibility studies
Business training and courses
Professional advice (accountant, solicitor)
Website development and branding
Equipment and tools purchased for the business
Travel to meet potential clients or suppliers

Capital Allowances from Day One

The Annual Investment Allowance (AIA) of £1,000,000 is available from the date you start trading. Any qualifying plant, machinery, or equipment purchased gets 100% relief in your first accounting period. See our article on capital allowances and timing for more detail.

Short first period: If your first accounting period is less than 12 months, the AIA is proportionally reduced. A 6-month period gets a £500,000 AIA.

Opening Year Loss Relief

If you make a loss in any of the first four tax years of your trade, you can carry the loss back against your total income (from all sources) of the three tax years preceding the loss year, starting with the earliest year.^[1]

Example: You leave employment (salary £50,000) and start a business in 2025/26, making a £25,000 trading loss. Using opening year loss relief, you can carry this loss back to 2022/23, generating a tax refund of up to £10,000 (at 40% higher rate). This provides vital cash flow in the early days.

Record-Keeping Obligations

From day one, you must keep records of:

All income (invoices, receipts, bank statements)
All expenses (receipts, supplier invoices)
Capital purchases (equipment, vehicles)
Bank statements for business accounts
Mileage logs if claiming vehicle expenses

Records must be kept for at least 5 years after the 31 January filing deadline for the relevant tax year. Companies must keep records for 6 years from the end of the accounting period.

Common First-Year Mistakes

Forgetting to register: Late registration can attract penalties
Mixing personal and business finances: Open a separate business bank account
Not keeping receipts: HMRC can disallow expenses without evidence
Ignoring NI: Self-employed individuals owe Class 2 and Class 4 NI from day one
Missing pre-trading expense claims: You can claim expenses from up to 7 years before you started

Frequently Asked Questions

When do I need to register as self-employed?

You must register with HMRC for Self Assessment by 5 October following the end of the tax year in which you started trading. For example, if you start a business on 1 January 2026 (tax year 2025/26), you must register by 5 October 2026. However, it is best to register as soon as you start trading.

Can I claim expenses from before I started trading?

Yes. Pre-trading expenses incurred within 7 years of starting the business are treated as if they were incurred on the first day of trading, provided they would have been allowable as a business expense. This covers costs like market research, business planning, training, and equipment.

Should I start as a sole trader or limited company?

Most people start as a sole trader for simplicity and lower compliance costs. You can always incorporate later when profits are high enough to make a company more tax-efficient (typically above £30,000–£50,000 annual profit). See our article on choosing a business structure for a detailed comparison.

Do I need to register for VAT straight away?

Only if you expect your taxable turnover to exceed £90,000 in the next 30 days. Otherwise, you monitor your rolling 12-month turnover and register when you cross the threshold. You can register voluntarily at any level.

Sources

Set up as a sole trader — GOV.UK
Set up a limited company — GOV.UK
Expenses if you're self-employed — GOV.UK
Register for Corporation Tax — GOV.UK