Starting a business is an exciting new chapter in one’s life, and it can be tempting to only focus on the parts of being an entrepreneur that bring the most joy and satisfaction.
But it’s important not to ignore the less exciting but just as important parts of running a business, like keeping financial records.
Yes, you should take care of your money first before doing anything else. If your business’s numbers aren’t kept right, you could run into big problems when it comes to taxes and cash flow.
On the other hand, getting it right from the start sets the tone for any business, leading to higher profits and more long-term success. If you own a small business, you don’t have to be great at math to prepare and manage your accounts. All you need is a basic understanding of bookkeeping and finance.
Getting this right takes time, but if you do it right, your business will be in a great spot.
There is always more than one way to do something, so bookkeeping can be done by hand or with software in the cloud.
Tasks like dealing with invoices, keeping track of expenses, keeping an eye on outgoings, and paying employees can take a lot of time.
You can hire someone to do it for you if you don’t have time to do it all yourself.
3 top picks of accounting software for small businesses
If you’re going to use software, you should look around to find the best package for your business. There are a few big players in the market, and each one has a slightly different set of features and prices.
Your business’s annual financial performance must be written down and presented in a certain way. This includes sales, costs, assets (such as stock, machinery, or equipment), and amounts owed.
Whether you run your business as a sole trader or a limited company will determine when you have to send in your accounts.
You can choose when your accounting year ends, but since taxable income for sole traders is calculated from April 6 to April 5, and accounts are needed to back up the tax return, it makes sense for sole traders (and partnerships) to have an accounting year that runs from April 1 to March 31.
The necessary accounts need to be done by January 31 of the following year so that they can be used to fill out your self-assessment tax return, which is also due on that date.
For limited companies, you can pretty much pick the accounting year that works best for you and your business, but you still have to fill out and send in your accounts to Companies House every year.
This is a tax that all limited companies in the UK have to pay. The main rate is currently 19% of any profit that isn’t set aside. Corporations must file a tax return and pay the tax due to HMRC within nine months and one day of the end of their accounting period.
Self-assessment income tax
You have to fill out another form if you want to figure out your personal income tax based on all the money you made from April 6 to April 5.
This form must be filled out, filed, and any taxes must be paid by January 31 after the 5 April tax year.
Income tax rates
A tax-free personal allowance of £12,570 (2022-23) is available to everyone, and approximately the next £37,699 of “basic rate” income above this personal allowance is taxed at 20 percent.
Any income above this falls into the “higher rate” (£50,271 to £150,000) band, and is currently taxed at 40 percent, which then goes up to 45 percent for earnings above £150,000.
Anyone earning over £100,000 also starts to lose their personal allowance: effectively, if you earn between £100,000 and £125,000, you will be taxed at 60 percent (tax at 40 percent on income over £100,000 up to £125,000 plus tax at 40 percent on the loss of personal allowance up to £12,500). And if you earn over £125,000 the personal allowance goes completely.
Additionally, out of employment (salary and wages) income comes national insurance, which is payable at various rates and thresholds.
In the case of a limited company, dividend income is taxed at lower rates but there is no national insurance to be paid.
- The tax-free dividend allowance is £2,000
- Basic-rate taxpayers pay 8.75 percent on dividends
- Higher-rate taxpayers pay 33.75 percent on dividends
- Additional-rate taxpayers pay 39.35 percent on dividends.
No matter how your business is set up, if your annual sales are more than £85,000, you must register for VAT. If your annual sales are less than £85,000, you don’t have to register.
You will charge your customers the standard VAT rate of 20%, which means you will need to add 20% to the value of your sales invoices and set this money aside from what your customers pay you.
Then, you’ll be able to get back any VAT you paid on purchases and costs for your business, and you’ll have to send the net amount to HMRC. The VAT must be reported and paid for every three months.
Making Tax Digital
Making Tax Digital (MTD) for VAT is a new HMRC law that is part of a larger plan to digitalize all taxes for UK companies. Over the next few years, the law will be put into place in stages.
As of April 2022, all VAT-registered businesses, no matter how much money they make, will have to keep digital records and send digital VAT returns using MTD-compatible software.
MTD for Income Tax and Self-Assessment will be put into place in April 2024. All businesses, landlords, sole traders, and partnerships with incomes over £10,000 will have to keep digital records, provide quarterly updates, and file their income tax and self-assessment returns using MTD-compatible software.
As the last part of MTD, MTD for Corporation Tax is expected to be put into place in 2026. Nothing has been written about how MTD would affect Corporation Tax.
Income tax and national insurance must be figured out, taken out of your employees’ gross wages and salaries, and sent to HMRC on their behalf.
This is a monthly payment that is taken out of your employees’ gross salaries. This means that your business doesn’t have to pay for it.
National insurance is taken out of an employee’s pay at a rate of 13.25 percent, but both income tax and NI don’t start until a certain amount of money is made.
Employee National Insurance contributions
|Weekly earnings threshold
|Secondary Threshold – earnings below this limit incur no NICs
|Upper Earnings Limit – earnings above the Primary Threshold and below the Upper Earnings Limit will be taxed at 12%.
|Any earnings above the Upper Earnings Limit are taxed at 2%
Employer’s national insurance is charged at a rate of 13.8 percent on the gross salary, again within certain thresholds – this is not deducted from their salaries and so it represents a real, additional tax cost to your business.
Different rates of national insurance contributions apply for self-employed sole traders:
Self-employed National Insurance contributions 2022-23
|Annual profits threshold
|Class 2 NICs rate
|Class 4 NICs rate
|Small profits threshold – Earnings below this threshold incur no NICs
|Lower Profits Limit
|Upper Profits Limit
IR35 tax reforms
In order to stop “disguised employment,” HMRC put thousands of independent contractors who were basically full-time workers under PAYE in April 2021. Because of these changes to IR35, the corporation that hires an independent contractor is now responsible for figuring out what their tax status is.
With all the information above, it’s probably clear what you should do about bookkeeping and basic accounting. You can do it yourself or hire a professional.
‘As the profits grow, it’s smart to have absolute control and visibility of your business, making sure that it’s set up in a tax-efficient way and you can make sound management decisions based on accurate, timely figures’
No matter what you decide, you should try to make a choice quickly and stick to it. Don’t try to do the job on your own for hours before giving up and giving it to someone who can do it better.
Bookkeeping, taxes, and accounting take a lot of time and are annoying, but they have to be done when a business starts up. This may be annoying.
But these things are important because they keep you safe and legal in the eyes of the tax man and give you important business information.
Over time, the amount of money coming in will go up. As your earnings go up, it’s smart to have full control and visibility over your business. This way, you can make sure it’s tax-efficient and make good management decisions based on accurate, up-to-date data.