Since starting a business is an exciting new chapter in your life, it might be tempting to put all of your efforts into the parts that bring you the most joy and satisfaction.
But it’s important not to do this at the expense of the less exciting but more important parts of running a business, like accounting.
Yes, you should get your finances in order as soon as you can. When it comes to taxes and cash flow, if you don’t keep track of your company’s numbers well, it could cause you a lot of trouble.
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.
Bookkeeping
Getting this right takes time, but if you do it right, your business will be in a great spot.
There are two ways to keep books: by hand or with cloud accounting software.
Managing invoices, keeping track of spending, keeping track of outgoings, and paying employees all take a lot of time.
If you don’t have time to do it yourself, you could pay someone to do it for you.
Three recommendations for the best small company accounting software
If you’re going to utilize software, it pays to look around for the best deal for your company. There are many major players on the market, each of which has somewhat different features and costs.
Yearly accounts
Your company’s annual financial performance, which includes sales, expenses, assets (such as stock or machinery or equipment), and amounts owing, must be reported in a formal record and a predetermined format.
Whether you run your business as a limited company or as a single proprietor will affect the deadline for filing your accounts.
Although you can choose when your accounting year ends, it makes sense for sole traders (and partnerships) to have an accounting year that runs from 1 April to 31 March because taxable income for sole traders is calculated based on 6 April to 5 April and accounts are required to support the tax return.
To be utilized for completing your self-assessment tax return, which is due on the following 31 January, the relevant accounts must be finished before that date.
Limited firms may choose their accounting year based on their needs and businesses, but they must still complete and submit their accounts to Companies House each year.
Occupational Tax
All UK limited firms are required to pay this tax, and the primary rate is 19% on any profits that aren’t ring-fenced. It is necessary to file a corporate tax return, and tax must be paid to HMRC within nine months and one day after the accounting period.
Taxes on self-employment
Unfortunately, you must complete another form to determine your income tax on all of your annual income (6 April through 5 April).
This form must be completed and submitted no later than the 31 January after the preceding 5 April tax year, and all applicable taxes must be paid.
Rates of income tax
Everyone is entitled to a tax-free personal allowance of £12,570 (2022-23); the additional £37,699 of “basic rate” income beyond this personal allowance is a 20% tax rate.
The “upper rate” (£50,271 to £150,000) tax bracket applies to any income above this amount, and the present rate is 40%; the rate increases to 45 percent for incomes beyond £150,000.
If you earn between £100,000 and £125,000, you will effectively be taxed at 60% (tax at 40% on income beyond £100,000 up to £125,000 + tax at 40% on the loss of personal allowance up to £12,500). Anyone earning over £100,000 also begins to lose their allowance. And your allowance is eliminated if your income exceeds £125,000.
Additionally, national insurance, due at varying rates and levels, is a component of employment-related income (salary and earnings).
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.
VAT
No matter how your firm is set up, you must register for VAT if your annual sales total at least £85,000; if not, registration is not required.
The normal VAT rate is 20%, which implies that you must add 20% to the value of your sales invoices and then set this sum away before receiving payment from your clients.
The VAT you spent on purchases and costs for your firm may be reclaimed, and you must pay HMRC the net sum of the two. Quarterly deadlines apply to both VAT returns and payments.
Digitalizing taxes
Making Tax Digital (MTD) for VAT is a new set of rules from HMRC that is part of a bigger plan to eventually digitise all taxes for UK businesses. The law will be introduced in stages over the next few years.
No matter how much money they make, all businesses that are registered for VAT must start using MTD-compatible software in April 2022 to keep digital records and send digital VAT returns.
Starting in April 2024, all businesses, landlords, sole proprietors, and partnerships with income over £10,000 will have to use MTD-compatible software to file their income tax and self-assessment forms and keep digital records. They will also have to give updates every three months.
The last step of MTD is MTD for Corporation Tax, which is set to start in 2026. So far, nothing has been said about how MTD would change Corporation Tax.
PAYE
You have to figure out your employees’ gross wages and salaries, take out income tax and social security, and then pay HMRC on their behalf.
This monthly payment comes out of the gross pay of your employees, so your company doesn’t have to pay for it.
National insurance (NI) takes 13.25 percent of an employee’s pay, but neither income tax nor NI are taken out until a certain amount of money is earned.
Employee National Insurance contributions
| 2022/23 | 2022/23 | |
|---|---|---|
| Weekly earnings threshold | Annual equivalent | |
| Secondary Threshold – earnings below this limit incur no NICs | £175 | £9,100 |
| Primary Threshold | £242 | £12,570 |
| Upper Earnings Limit – earnings above the Primary Threshold and below the Upper Earnings Limit will be taxed at 12%. | £967 | £50,270 |
| Any earnings above the Upper Earnings Limit are taxed at 2% |
Source: Crunch
Employer’s national insurance is charged at a rate of 13.8 per cent 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 | £6,725 | £3.15 | 0% |
| Lower Profits Limit | £11,909 | £3.15 | 10.25% |
| Upper Profits Limit | £50,270 | £3.15 | 3.25% |
Source: IFT
IR35 tax changes
In April 2021, HMRC brought thousands of freelance contractors who were really full-time employees into the PAYE system. This was done to stop “disguised employment,” which was what the tax man called it. Because of these changes to IR35, the company that hires a self-employed contractor is now the one who has to figure out what their tax status is.
What next?
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 your profits grow, it’s smart to have full control and visibility over your business, making sure it’s set up in a tax-efficient way and that you can make good management decisions based on accurate, up-to-date numbers.”
No matter what you choose, make a decision as soon as possible and stick to it. You shouldn’t spend hours on it before giving up and asking someone who can do it better to finish it for you.
Bookkeeping, taxes, and accounting take a lot of time and are annoying, but they are necessary parts of running a business. This might be a pain.
But these things are important because they keep you safe, make sure you follow tax laws, and give you information you can use to run your business.
Over time, the amount of money coming in will go up. As your company makes more money, it makes sense to have full control and visibility over it. You should also make sure that it is tax-efficient so that you can make management decisions based on accurate, up-to-date information.
