Setting up a small business means entering the intimidating world of accounting. It’s pretty difficult to figure out where to begin without a little guidance from some friendly small business accountants – so here we are!
One of the first steps is deciding how you’re going to trade; sole trader, limited company or limited partnership (to name just a few). Sole trader and limited company are easily the most popular, and you can find some helpful information about the pros and cons of each here.
Next you need to decide how you’re going to keep track of your finances and what system you plan on using – easy-peasy! The simplest way of doing this is to separate your personal and business accounts and keep all receipts until you make note of them (unless you’re claiming VAT – in which case you should keep all receipts for six years minimum!).
Do you prefer spreadsheets or accounting software? You can find a reviews of a variety of accounting software if you’re struggling to make your mind up. Bookkeeping includes recording expenses, monitoring outgoings and dealing with invoices. It can be time-consuming, so you might need some help from an accountant or an accounting service.
Not every small business plans on hiring employees, but if you are, you’ll need to set up a payroll system. This is how you’ll pay your employees each week or month, and how you’ll figure out how much must be deducted from pay for tax and National Insurance. Other deductions may include student loan repayments or pension contributions.
PAYE is the system by which HMRC works out the deductions of Income tax and National Insurance to come from your employees’ wages based on their tax code.
You will operate PAYE as part of your payroll as long as your employees are paid more than £112 or more a week, do not receive expenses and benefits and do not have another jobs or receive pensions. If any of these scenarios are the case then you will still have to keep payroll records.
Being tax efficient depends a lot on the business structure you use and whether it’s right for the company. This is often true for self-employed individuals who begin as a sole trader and whose business grows to a point where it becomes more tax efficient to be a limited company. Roughly, this is when a business is generating a profit of more than £25,000 a year, although to check the specifics of your business you can drop us a line by asking one of our accountants.
Limited companies can take their own dividends from the business, which do not attract National Insurance. This is a pretty big method of saving tax for most small businesses. Dividends are a sum of money paid by a company to its shareholder(s) and are paid from company profits once corporation tax is deducted.
The changes to the dividend system for 2016 are big news, and could mean you won’t save as much as you would have done under the old system. To see a full explanation of the new dividend allowance, see Dividend Allowance Changes Explained.
Expenses you can claim for from the government vary between each business structure, but the main thing to remember is that if an expense has been claimed wholly under the running of your business (and you’re not telling fibs to HMRC) then you can probably claim for it.
As a sole trader you should really think about whether the expense is necessary. That’s because anything you claim won’t be able to be taken as cash, even though it is less expensive to buy the items through the business than it would have been to buy them personally. In order to claim expenses as a sole trader, all you have to do is add up all your expenses receipts for the year, and file them in your annual self-assessment tax return.
As a limited company, you will claim expenses through Corporation Tax which will be recorded through your company tax returns that are filed annually. See a full list of expenses you can claim tax-relief on as a limited company here.
This is paid by all UK limited companies and is charged at 20 percent on profits generated up to £300,000. You must complete a corporation tax return, with tax due to be paid to HMRC within nine months of the accounting period.
Self-Assessment Income Tax
If you’re trading as a limited company you must also fill in a form to determine your personal income tax on all your income. The current deadline for self-assessment returns is 31 January, although this is set to change as the digital tax accounts system becomes implemented in the next few years.
Whatever your business structure, you must register for VAT if your turnover is more than £82,000. If your turnover is beneath this, you have the decision whether to register for VAT voluntarily. To find out about the pros and cons of VAT registration, and for everything you need to know, see our guide.
Flat Rate VAT Scheme
There are a number of VAT schemes available if your company is planning on becoming VAT registered. The flat rate scheme allows businesses to pay a fixed rate of VAT to HMRC and allows you to keep the difference between what you charge your customers and what you pay to HMRC. It is available to businesses with a turnover of less than £150,000 and was introduced to simplify the VAT registration process for small businesses and freelancers.
Still got questions about your accounts? Or have we missed something out? You can get in touch by leaving a comment below or asking one of our accountants a question for free here.
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About The Author
We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!