The number of small businesses in the UK has been steadily increasing since 2017 and now stands at six million. The recession kick-started the rise, encouraging many people to become self-employed after finding it more difficult to secure full-time jobs.
Setting up in business can be exciting and is a significant and proud milestone for any owner. However, as you excitedly start winning new clients, you shouldn’t keep your eye off the ball and neglect the basic and essential tasks such as the financial aspects. If you don’t properly manage your finances from the start, issues may come up that will seriously affect your profits and tax payments.
Think of the finances as the foundation for your business. By setting them up properly, your earning potential can rise and lead to greater business opportunities. You don’t need to do the books. However, it’s better to have at least some basic knowledge of bookkeeping and finance. Such knowledge will come in handy when talking numbers with accountants and bookkeepers.
Bookkeeping tasks
You may think of bookkeeping as the tedious part of running a business. If you’re a people person, you’d perhaps rather focus on making sales. However, it’s also the crucial part where you record your sales and expenses, which in turn tells you if the business is making money or not.
There are numerous tasks involved like writing invoices, reporting expenses, monitoring payables and preparing employees’ salaries but instead of manually conducting these tasks you could choose to use:
- Software that automatically completes such tasks
- Hire an external accountant instead
This will free up more of your time to focus on your business operations.
Five good bookkeeping practices
Here are some ways to help you keep on top of your financial records and reports.
Regular bookkeeping schedule
As mentioned earlier, many business owners view bookkeeping as a tedious task. However, just think that the consequence of sloppy bookkeeping could be a fine from HMRC. Furthermore, the longer you put off sorting through and organising paperwork, the more difficult it will be to keep it in order.
Schedule a date to update books. Just set aside an hour of your time, daily or weekly, to keep timely and accurate records of your profits and expenses.
Recording and keeping correct records
Even if you choose to hire an accountant, you still have to maintain accurate financial records. If you don’t, the bookkeeper will have a harder job of determining the essential information. This may result in you being invoiced a higher bill for their time.
To avoid this happening, get hold of your financial records and check:
- Did you categorise the accounts properly?
- Is your system outdated and in need of an upgrade?
- Are the invoices billed correctly?
- Are all your expenses accurately recorded?
You may want to invest in a simple but robust bookkeeping system that allows you to easily enter data. To keep your information records accurate, avoid changing any figures you log every month. It will also help your accountant to find out any errors quickly.
Be consistent
If your business has regular transactions, like ‘monthly rent’, organise them under the same category title. It will help shorten the time and effort spent by your accountant when checking your accounts. Also, consistently using the same category makes it easier to import your bank data into your accounts.
Simplify your records
Even if you’re using bookkeeping software, it’s best not to post entries that aren’t relevant to your business. For example, if you’re still planning to pay a supplier, there’s no need to record it your system. Once you’ve paid, you can then record the transaction as a payment.
Automate your bookkeeping
There’s no need to record every transaction manually when software can make the task easier. For example, some expense management software allows you to take photos of expenses and automatically upload them into your account. Such a process saves you from having to keep hold of receipts.
Also, an online accounting system lets you view and pull your bank data automatically without having to download or upload your bank statements.
Preparing and presenting annual accounts
Annual financial statements are common regulatory requirements. You’re also expected to present them in a prescribed and formal format. Often, these documents show your various accounts like assets, liabilities, sales, and costs.
The due date for submission will depend if you’re operating as a sole trader or limited company.
Specific information for:
Sole traders
If you’re a sole trader, you have the option of choosing your accounting year. However, you must calculate your taxable income every year from 6 April to 5 April. Your accounts are used to back up your tax returns. So most sole traders and even partnerships prefer to use the 1 April to 31 March accounting year.
Make sure you complete all your relevant accounts before the following 31 January. You’ll need them to complete your self-assessment tax returns.
Limited companies
You can also choose the accounting year that will suit your business. However, you still have to submit your accounts annually with Companies House.
Tax computation and payments
Corporation tax
All UK registered limited companies are required to pay 19 percent tax of their profits. However, ensure that you don’t include ring-fenced income in your tax computation.
What is ring-fenced income? These are profits often derived from oil extraction or oil rights in the UK. You should complete a:
- Corporation tax return
- Tax payment to HMRC (within nine months and one day of the accounting period)
Income tax
In the UK, our earnings and income are subject to self-assessment income tax. You need to calculate your personal income tax for the 6 April to 5 April accounting year. Also, you must complete a form, file it, and pay it no later than 31 January.
In terms of the tax you pay:
- You have a tax-free personal allowance of £11,850 (2018/2019 period)
- The first £32,000, called ‘basic rate’ income, is taxed at 20 percent (after deducting your personal allowance). Any income you receive above that amount will be subject to a higher tax rate of 40 percent.
- If your earnings exceed £150,000, the tax rate goes up to 45 percent.
Unfortunately, if your income is above £100,000, you lose your personal allowance.
You also have to consider National Insurance, which is payable at various rates and thresholds. Fortunately, if you’re a limited company, dividend income often incurs lower tax rates, and no National Insurance payment is required.
VAT
Regardless of your business structure, you’ll have to register for VAT if your annual sales have reached £85,000 or more. If it’s below that amount, VAT registration is optional.
To compensate for the VAT payment, you can charge your customers the 20 percent VAT rate. In your invoice, add at least 20 percent to the sales total. Keep the amount for your next VAT payment.
Also, you can offset any VAT payment for your business-related purchases or expenses from your current VAT payables. Afterward, pay the HMRC the remaining net VAT amount. You should file VAT returns and payments every quarter.
PAYE
In the UK we have the Pay-as-you-earn (PAYE) income tax system. It means that the business deducts the employees’ income tax and National Insurance contributions before paying their salaries. The Government will decide on the tax rate based on the current tax codes. The amount deducted goes to HMRC.
Employees pay at least 12 percent of their wages towards National Insurance while employers pay 13.8 percent based on the gross salary and defined thresholds. Keep in mind that your share isn’t deductible from employee salaries. So consider this as an additional tax cost.
Ways to reduce your tax bill
One of the significant benefits of hiring an accountant is their expertise in legally reducing your tax liabilities. Here are some of the actions your business can take to get a lower tax bill:
Match your income with your corresponding expenses
Some companies may receive payment upfront before they start a job. During such a situation, the money paid often shows up as income before the costs for the work is incurred. As a consequence, you may end up spending your taxes in advance.
For example, your business received £5,000 April for work you’ll deliver in May. To avoid overpaying your taxes, record this as income in May not April.
Don’t forget these often ignored expenses
In theory, you deduct every business-related expense. However, many businesses forget to deduct some costs like:
- Bad debts
- Interest payments (if you have any business loans)
- Rental for the use of home as a place of business
- Lease premiums
- Warranties
- Provisions for stock losses (in case your stockholdings have lower market values than their costs)
Make use of your income tax allowance
Your tax-free allowances are the initial amount you deduct from your taxable income. Consider using your allowances from:
- Income tax
- Savings
- Dividends
You can receive in total £14,850 of ‘tax-free income’ if you’re single or £29,700 if you’re married. The trick is to earn enough income to make full use of personal allowances. However, as your income rises, your allowances may also reduce or vanish. To learn how to best deploy this strategy, you may wish to consult with experts like Northants Accounting small business accountants.
Corporate tax relief
It’s normal for businesses to deduct expenses related to their trade. However, are you aware that your business can reduce its tax bill through the Research and Development tax relief? If you’re involved in software or innovative industries that include solving significant problems for clients, you’re eligible to apply for RND relief. Since this is a complicated tax strategy, you’ll need to consult a tax specialist.
Shift to a digital tax system
As of 1 April 2019, all VAT registered businesses need to keep digital records. Also, you need to submit all your VAT returns to HMRC via the Making Tax Digital (MTD) compatible software. If your system is incompatible, there’s the risk of incurring surcharges if you don’t submit the VAT returns on time. If you still haven’t gone digital or your system is incompatible with MTD, consult your accountant or bookkeeper.
Tax breaks from investment schemes
Investment schemes like EIS or SEIS offer tax breaks such as:
- Income tax refunds – You can claim half of your investment costs against any income tax you paid at source
- Free capital gains tax – If you sell the investment at a profit, you don’t have to pay the capital gains tax
- Free inheritance tax (for investors)
However, these kinds of investment schemes have various specific requirements, so it is better to consult an expert before investing in such projects.
Conclusion
As you may appreciate there’s a lot to running a business than simply balancing your accounts and bookkeeping. You should not overlook the importance of keeping your finances under control. By not doing so, you could end up with a bigger task on your hands and will be constantly trying to play catch-up. You can always hire a bookkeeper or accountant to take care of your accounts. This will allow you to focus on growing your business. However, you should at least learn the basics of financial record keeping. Another benefit that comes from hiring an accountant is that through their financial expertise they can help your business stay up-to-date with tax regulations and ensure your accounts are always accurate and compliant. At the same time, they will help you avoid tax penalties whilst keeping your tax costs down.
