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Starting work for yourself can be exciting. You have more control over your time; you can choose the work you want to take on, and you get to build something that belongs to you. But there is another side to being self-employed that you need to get used to, and that is managing your money. Your first year can be a learning curve, especially if you have never had to deal with your own taxes, business expenses and financial records before.

The good thing is that you do not need to become an expert in accounting to get things right. You just need to understand the basics and avoid a few common mistakes. Here are seven money mistakes you should try to avoid in your first year of self-employment.

Most Common Money Mistakes to Avoid When You First Become Self-Employed

1. Not Keeping Money Aside for Tax

When you are employed, your Income Tax is normally taken from your pay before the money reaches you. When you become self-employed, things work differently. The money you receive from customers or clients may look like yours to spend, but part of it may eventually need to go towards your tax bill. If you spend everything as it comes in, you could find yourself struggling when your Self Assessment payment is due.

A simple way to avoid this is to put some money aside whenever you get paid. You do not have to wait until the end of the tax year to work out what you owe. Keep a separate pot for tax and treat that money as something you cannot spend. Your Self Assessment bill is normally due by 31 January, and you may also have payments on account to make, with the second payment normally due by 31 July. Knowing these dates from the beginning can make your first tax bill much easier to manage.

2. Mixing Business and Personal Spending

When you are just starting out, it can seem easier to use your normal bank account for everything. You might buy a laptop for work, pay for software, receive a client payment and then use the same account to pay your household bills. It does not seem like a big problem at first, but after several months, it can become difficult to work out which transactions were for your business and which were personal.

Try to keep your business money separate from your personal spending where you can. This does not just make things easier for your tax return. It also helps you see how your business is actually doing. You will have a much clearer idea of what is coming in, what is going out and how much money you really have available.

3. Leaving Your Records Until the Last Minute

Nobody wants to spend January going through hundreds of emails, bank transactions and old receipts trying to remember what they spent money on six months ago. Yet this is exactly what can happen if you leave your records until you need to complete your tax return. It can also mean that you forget about genuine business expenses simply because you cannot find the receipt or remember the details.

Make record-keeping part of your normal routine instead. Keep your invoices, receipts, bank statements and other business records in one organised place. You can use a spreadsheet, bookkeeping software or another system that works for you. It does not have to be complicated. The main thing is to update it regularly rather than letting everything pile up until the tax deadline is close.

4. Assuming Every Business Expense Can Be Claimed

Once you learn that self-employed people can claim allowable business expenses, it can be tempting to think that anything you buy for yourself can somehow be included on your tax return. That is not the case. The expense needs to meet the relevant rules, and you need to be able to show that it was for your business.

This is particularly important when an expense has both personal and business use. For example, you may use your phone or home internet for work as well as for personal reasons, so you cannot simply assume that the whole cost is a business expense. If you are unsure about something, check the rules before claiming it. Keeping the right records and understanding what you can actually claim will save you a lot of trouble later.

5. Forgetting About Your Other Income

Your self-employed work may not be the only thing you earn money from. You could also have a job, savings, investments or rental income. It is easy to focus so much on the new business that you forget these other sources of income can also affect your overall tax position.

If you rent out a property, for example, you need to keep proper records of the rental income and relevant expenses alongside your other financial information. Speaking to a rental property tax accountant can help you understand how your property income fits into your wider tax position. The important thing is to look at your finances as a whole rather than treating each source of income as if it has nothing to do with the others.

6. Setting Your Prices Without Thinking About Tax and Costs

When you first start working for yourself, you may look at what other people charge and decide what you think sounds reasonable. The problem is that the amount you charge is not the same as the amount you take home. Your income may also need to cover tax, software, equipment, insurance, professional fees, unpaid holidays and the periods when you do not have enough work.

Before setting your prices, work out what you actually need to earn. Think about your regular business costs and how many hours you can realistically charge clients for. You should also leave some room for quieter months. A price that looks attractive to a customer may not be enough for you once all your costs and taxes have been taken into account.

7. Trying to Deal With Everything Yourself

There is a lot to learn when you become self-employed. You are responsible for finding work, dealing with clients, sending invoices, keeping records and making sure your tax return is completed correctly. It can be tempting to handle every part of it yourself, especially when you are trying to keep your costs down in the first year.

But getting help does not mean you have failed to manage your business. If you are unsure about your tax position, struggling with your records or simply do not have the time to keep up with everything, getting advice can make things much easier. Sole trader accountants can help you understand what you need to keep track of, what expenses you may be able to claim and when your tax payments are due. Getting advice early can also be much easier than trying to sort out a problem after you have already made a mistake.

Make Your First Year Easier

Your first year of self-employment will probably come with a few lessons. That is normal. You do not need to get everything perfect from day one, but you should make an effort to build good money habits early. Once these things become part of your normal routine, managing the financial side of your business becomes much less stressful.