Small Ways to Simplify Your First Business Tax Return

There is an incredibly long list of things no one tells you when you’re starting a business. Commercial rent is due before you’ve made a penny. Figuring out insurance. Faking it till you make it when you truly have no clue. But the one that sneaks up on most new business owners — and rightly leaves them reeling — is the tax return.

More than 1.3 million new businesses were created in the UK last year. Every single one of these founders will have to fill in a Self Assessment form at some point, and most of them will regret not getting their act together sooner. The deadline is 31 January after the end of the tax year (so your return for 2025/26 is due by 31 January 2027), and HMRC isn’t very sympathetic if you’re late – £100 fine straight away, then £10 a day once you’re three months past it.

The good news? Your first tax return doesn’t have to be as scary as everyone makes it out to be. A little preplanning goes a long way.

Get Registered Before HMRC Comes Knocking

This is the part everyone ignores because it’s not very exciting and can be done when you have time. It can’t. Sole traders also need to be registered for Self Assessment by 5 October after the end of the tax year in which you started your business, unless otherwise told so by HMRC — and miss that date, and already it’s a £100 penalty before you’ve sent anything in.

The registration is painless enough — filling in an SA1 form on the HMRC website takes maybe ten minutes. Once you’re registered, they’ll give you a Unique Taxpayer Reference (UTR) that’s going to be important for all tax matters in the future.

A couple of other registrations worth getting ahead of:

• VAT — The threshold is going up to £90,000 in 2026 (it was £85,000). If your turnover is heading in that direction, you’ll want to learn how to register for VAT well before you’re legally required to. You need to register within 30 days of crossing the threshold, and a late registration means a £400 penalty plus 5% of the VAT you owe. Not worth it.
• PAYE — Hiring someone? Register for PAYE before you run your first payroll. The threshold for Class 1 National Insurance is £153 per week.
• Construction Industry Scheme (CIS) — If you’re a subcontractor, register immediately. Another £100 fine if you don’t.

Separate Your Money on Day One

If you’re running a limited company, a business bank account is a legal requirement anyway. But even sole traders — who technically can use a personal account — should open a separate one the moment they start trading. The reason is simple: when January rolls around, and you need to figure out exactly what you earned and what you spent, having everything mixed in with your personal spending is an absolute headache.

A dedicated business account gives you a clean record of every transaction. That’s your paper trail for expenses, your proof if HMRC ever asks questions, and it saves you hours of scrolling through bank statements trying to remember whether that £47.99 was a business lunch or your weekly food shop.

There are solid free options out there. Starling Business charges nothing — no monthly fee, no transaction fees, unlimited payments. Barclays offers 12 months free for new businesses before moving to £8.25 a month. Tide costs £9.99 monthly but integrates directly with Making Tax Digital software, which is worth considering if you want your VAT returns to more or less file themselves.

Whatever you pick, get it open early. Trying to untangle a year’s worth of mixed finances the week before your deadline is one of the most avoidable headaches in business.

Get Your Head Around Making Tax Digital

This is the big change coming in April 2026, and a lot of sole traders still haven’t properly clocked it. Making Tax Digital (MTD) for Income Tax becomes mandatory, which means you’ll need to keep digital records and submit quarterly updates to HMRC through compatible software. Not a spreadsheet. Not a shoebox of receipts. Proper software.

The penalties for not complying sit between £100 and £300, but the real cost is the chaos of trying to sort it all out at the last minute. The quarterly updates aren’t full tax returns — they’re basically summaries of your income and expenses — but you need the right setup to submit them.

Three of the more popular options:

• FreeAgent (about £23/month) — HMRC-recognised, handles Self Assessment, VAT, and MTD. Popular with freelancers and sole traders.
• Xero (about £24/month) — Auto-categorises transactions if you connect your bank feed. Good for anyone who hates manual data entry.
• QuickFile (about £15/month) — Cheaper, handles unlimited clients, does the job without the bells and whistles.

All three allow you to snap photos of receipts on your phone and upload them on the spot, which is kind of a little thing but will save you genuinely from that frantic end-of-year scramble when you’re rummaging through coat pockets and old wallets.

HMRC calculates that MTD saves the typical sole trader about 40 hours a year. That figure seems optimistic, but one even half that big is worth having.

Claim Everything You’re Entitled To

This is where many first-year business owners leave money on the table. HMRC allows you to deduct reasonable and necessary business expenses from your turnover when calculating taxable profit, so if you have been cutting corners on expense tracking, then you’ve been paying more tax than is required.

When remaining under the threshold of £85,000 a year as a sole trader, HMRC’s simplified expenses scheme simplifies things. You don’t have to calculate the exact cost of fixtures or deduct depreciation for items like a home office or your car; instead, you take a flat rate:

• Working from home — 25p per hour. If you do 10 hours a week, that’s about £1,300 a year you can deduct.
• Business mileage — 45p per mile for the first 10,000 miles, then 25p after that.
• Mobile phone — Whatever percentage is genuinely for business use.

On top of the simplified rates, you can claim capital allowances on bigger purchases. A laptop? Fully deductible. A website? Fully deductible. Training courses that relate to your business? Same. Marketing spend on Google Ads or social media? All of it.

One sole trader in Leeds claimed £8,200 in their first year — home office costs, a point-of-sale system, and equipment. At the basic 20% rate, that knocked £2,000 off their tax bill. Not life-changing money, but not nothing either, and most of it was stuff they would have forgotten to claim if they hadn’t been tracking expenses from the start.

The average first-year deduction for sole traders who actually bother to claim properly sits around £5,000. If you’re paying 20% tax, that’s a grand back in your pocket.

Understand What “Payment on Account” Actually Means

This one catches people out badly. You file your first return, you pay what you owe, and then HMRC immediately asks for an advance payment towards next year’s tax as well. It’s called payment on account, and it trips up nearly every new business owner because nobody explains it until the bill arrives.

Here’s how it works. HMRC assumes your next year’s tax will be roughly the same as this year’s. So they ask you to pay half of it in advance on 31 January (at the same time as your current year’s tax), and the other half on 31 July. The average sole trader is looking at about £1,750 per instalment.

So if your first year’s tax bill is £3,500, you’ll actually owe £5,250 on 31 January — the £3,500 for the current year plus £1,750 as the first payment on account for next year. That can be a genuine shock if you haven’t budgeted for it.

The simplest way to prepare is to set aside 25–30% of your profits throughout the year. Put it in a separate savings pot and don’t touch it. When January comes around, the money is already there, and you’re not scrambling.

When It Makes Sense to Get Professional Help

Most first-year sole traders can handle their own tax return, especially with decent software doing the heavy lifting. But there’s a point where professional help pays for itself — literally.

If your tax situation is straightforward (one income stream, simple expenses, no employees), you can probably manage. But if you’ve got multiple income sources, you’re approaching the VAT threshold, or you’re claiming R&D tax credits, an accountant will almost certainly save you more than they cost.

A basic sole trader tax return through a firm like TaxAssist runs about £750 on average. What you get for that is someone who knows which reliefs you’re missing, who files everything on time, and who deals with HMRC if they have questions. Some accountants reclaim an average of 37% more in missed reliefs compared to self-filed returns, which at that point more than covers their fee.

Even if you’re not ready to pay for an accountant yet, consider booking a one-off consultation before your first filing. An hour with someone who knows what they’re doing can flag things you’d never think to claim on your own.