So you’ve taken the plunge and you’re self-employed. Make sure you’re tax savvy and that you consider the following seven top tax tips. Remember we all have to pay tax but we don’t need to tip HMRC! Get organised so that you know when you have to pay tax and how much you will need to set aside. Also make sure that you take full advantage of all the tax breaks available to self-employed individuals. New business owners can do without nasty surprises so forewarned is forearmed. Sarah Hamilton, founder of SJH Accounting, offers her top tax tips for freelancers.

The hardest thing in the world to understand is the income tax. - Albert Einstein

The nuts and bolts of self-assessment tax

It’s a good idea to familiarise yourself with self-assessment filing requirements and deadlines. As a self-employed business owner you will be liable for tax on your profits (income less allowable expenses). You must file an annual self-assessment tax return once a year; by October 31 if you file a hard copy, and by January 31 if you file online.

Tax is calculated on profits (after deducting your personal allowance) using the appropriate tax rates (banding is the same as if you were taxed under PAYE). Any payments on account will be deducted from the tax liability.

Choosing your year end

The majority of self-employed business owners choose a March 31 year end which is just before the end of the tax year (April 5). Tax is payable 10 months later by January 31 in the following year. However, it is possible to select an earlier year end, thereby delaying the payment of tax. For example, if the tax year is April 5, 2013 the year-end could be set at April 30, 2012 with tax payable on January 31, 2014. This allows 22 months to pay tax from the year end.

Dealing with previous employment

Self-employed individuals may be entitled to a refund in their first year of trading if they were employed and taxed under PAYE for part of the tax year. Tax would have been deducted under PAYE so if they left paid employment part way through the tax year they may be entitled to a tax refund as part of the personal allowance may not have been used. A tax refund can be made under self-assessment tax or as a one off refund. This may be a useful cash injection when starting up a new business.

Rules on losses

Many self-employed business owners incur losses in the early years of trading due to high start-up costs and it is therefore important to note the rules on losses.

There are a number of options with regards to claiming relief for losses, and the amount of tax refunded will depend on the rate of tax paid in previous years.

It is possible to offset the loss against income in the current or previous tax years. The options available are carrying the loss back against other income received in the tax year arising three years previous; or set it against other income in the tax year of the loss; or set it against other income in the previous tax year. Total taxable income is reduced by the amount of the loss, and for higher rate tax payers in all of these years, there could be up to a 40 percent tax refund for the losses made. Otherwise it is possible to carry the loss forward and set it against future profits from the business.

Budget for your tax

It’s a good idea to keep on top of your accounts so that you have a handle on your profit and a good idea month on month as to how much to save each month for tax. This information will help you to budget for tax and save enough so that when you file your tax return there are no nasty surprises. You may wish to transfer an estimated amount of tax each month to a deposit account or to make a monthly payment on account to HMRC.

Use of home allowance

If you work from home you will be able to claim a use of home allowance to cover a proportion of your utility bills relating to business usage. Calculations vary depending on utility costs and the number of rooms in the property used for the business.

Training costs

If you’re starting a new business and you have re-trained you may not be able to claim these training costs as tax allowable expenses. On-going training costs are generally allowable but where training takes place to acquire skills that are essential for the business, such costs may not be allowable.