How to prepare for your first tax return as a self-employed individual

The UK tax system requires self-employed individuals to report their income and pay taxes through self-assessment. You are responsible for calculating your taxes and submitting a tax return to HM Revenue and Customs (HMRC) annually. The tax year in the UK runs from April 6 to April 5 of the following year, and your tax return is due by January 31st of the next year.

2. Register for Self-Assessment

If you're newly self-employed, you must register with HMRC for self-assessment as soon as possible, but no later than October 5 of the second tax year of your self-employment. For example, if you started your business in June 2023, you should register by October 5, 2024. You can register online through the HMRC website or by filling out a form and sending it by post.

3. Keep accurate records

One of the most crucial aspects of preparing for your tax return is maintaining accurate and detailed records of your income and expenses. This includes invoices, receipts, bank statements, and other financial documents related to your business. It's essential to keep these records organised and easily accessible, as you'll need them to calculate your taxable income and claim any eligible deductions.

4. Understand allowable expenses

You can deduct certain expenses from your income to reduce your tax liability as a self-employed individual. These allowable expenses include office rent, equipment purchases, travel costs, and professional fees. It's important to familiarise yourself with the rules surrounding allowable expenses and keep track of them throughout the year.

5. Consider hiring an accountant

While it's possible to complete your self-assessment tax return independently, many self-employed individuals find it beneficial to seek the assistance of a professional accountant near them. An accountant can help you navigate the complexities of the tax system, ensure you claim all eligible deductions, and provide valuable advice on tax planning and business growth. When choosing an accountant, look for someone with experience working with self-employed individuals and small businesses.

6. Be aware of Capital Gains Tax

In addition to income tax, self-employed individuals may also be subject to capital gains tax if they sell or dispose of assets related to their business, such as property, equipment, or shares. It's important to keep track of any capital gains or losses throughout the year and report them on your tax return. If you need more clarification about the implications of capital gains tax on your business, consider seeking the advice of a tax advisor.

7. Plan for tax payments

As a self-employed individual, you'll likely need to make payments on account towards your tax bill. These are advance payments based on your previous year's tax liability and are due by January 31st and July 31st each year. Budgeting for these payments and setting aside sufficient funds to cover your tax obligations is crucial. Failure to make payments on time can result in interest charges and penalties.

8. File your tax return on time

Once you've gathered all the necessary information and documents, it's time to complete and file your self-assessment tax return. You can do this online through the HMRC website or by submitting a paper return. Ensuring your return is accurate and submitted by the January 31st deadline is important to avoid any late filing penalties. If you need clarification on any aspect of your return, feel free to seek guidance from HMRC or your accountant.

9. Keep an eye out for tax investigation

In some cases, HMRC may investigate your tax affairs more closely. This can be stressful and time-consuming, but it's important to remember that an investigation doesn't necessarily mean you've done anything wrong. If you are subject to a tax investigation, it's crucial to cooperate fully with HMRC and promptly provide any requested information or documentation. Having accurate records and seeking the advice of a tax professional can help you navigate the investigation process more smoothly.

10. Learn from your first tax return

Completing your first self-assessment tax return as self-employed is a significant milestone. Take the time to reflect on the process and identify any areas where you can improve your record-keeping or tax planning for the future. Consider seeking feedback from your accountant or tax advisor on optimising your tax strategy in the future.

11. Stay informed about tax changes

The UK tax system is subject to frequent changes and updates, so staying informed about any new rules or regulations that may affect your business is important. Look for news and announcements from HMRC and consider subscribing to industry publications or joining professional organisations to stay up to date on tax matters.

Preparing your first tax return as a self-employed individual may seem daunting, but with proper planning and organisation, you can ensure a smooth and successful submission. To do this, you need to understand the self-assessment system, keep accurate records, and seek the guidance of a professional accountant near me when needed. Remember, being proactive and informed about your tax obligations is crucial for your business's long-term success and growth.

"Did you know that HMRC has the power to investigate your tax affairs for up to 20 years under COP9 (Code of Practice 9) if they discover undeclared income?

Failing to report all your income can lead to significant problems, including hefty fines and potential legal action.

To protect yourself, it's crucial to ensure you've reported all your income to HMRC. Not only is it the right thing to do, but it also safeguards your peace of mind and financial well-being.

You can use HMRC's Disclosure Services to report your income or turn to the Worldwide Disclosure Facility for income earned outside the UK."