Whether you are forming a limited company or you’re a sole trader going alone, our accountancy partner Mazuma have produced this complete guide to keeping accounts for your small business.

small business accounting

Starting up your own business is both an exciting and daunting prospect. Although it’s hard to know for sure what the future may hold for your business, one thing is for certain – you’ll need to balance the books.

But where do you start if the whole process of running a business and filing accounts is new to you? How do you tell your PAYE from your NICs? What’s the deal with VAT? What’s the best way to stay on top of your accounts when you only have so much time in the day?

Thankfully, our accountancy partner Mazuma are on hand to help. They’re experts at managing the accounts of small businesses and have a lot of great advice to share.

Read their ultimate guide to accounting for small businesses below. For more advice from Mazuma, read their previous guides:

How does the type of company I set up affect bookkeeping requirements?

All companies that operate in the UK are required to make tax contributions, which in the main are paid to Her Majesty’s Revenue and Customs (HMRC). However, these contributions can take different forms depending on how the business is set up. In short, the more complicated the structure of the company the more complicated it is to keep accounts.

  • Sole traders – All sole traders have to pay income tax on taxable profits, as well as national insurance contributions (NICs) – assuming they have earned enough throughout the year to warrant doing so
  • Limited companies – If you run a limited company you are required to pay corporation tax
  • Employers – If you have staff on the payroll you may have to make income tax and national insurance deductions from their monthly salaries. On top of that, you may also have to pay employer’s NICs for each employee that earns over a certain threshold
  • VAT on goods and services – If you make more than £85,000 per year from certain goods and services then you’ll have to register your company for VAT
  • Business rates – If your company operates out of an office or retail premises then it is also likely that you will need to pay business rates

As you can see, there is a lot to think about – which is why it is essential that you keep accurate accounts for your business, however you choose to structure it.

If you’re just getting started and need help with how to organise and structure your business, read Mazuma’s guide: Which Business Structure is Best?

How to keep accurate accounts

First of all, make a point of keeping all your business receipts and the records of all your payments. It may sound obvious, but it makes the foundation that your accounts are built on: incomings versus outgoings. Starting off on the right foot and being organised with your receipts and paperwork really makes a difference in the long-run.

The big decision is whether to hire someone in to look after your accounts, or to do it yourself using accounting software. Depending on your level of experience in dealing with accounts and the amount of time you can dedicate to bookkeeping, there are pros and cons to each options. However, we find the most cost-effective option is to use an experienced accounting service.

This will likely save you a lot of time, and comes with the added bonus that your accounts will be accurate.

It can be very time-consuming processing invoices, recording and categorising expenses, generating payslips for employees etc. so using a professional online accounting service frees up your time so you can focus on growing your business.

How accounts are presented

Your accounts are presented as an annual summary of the performance of your business. They are required to follow a specific format which details your sales, your costs and your assets. The amount you owe in the form of taxes and other contributions will be taken from this report, so it’s important that your accounts are accurate.

If you are self-employed, a director of a company or you collect any other form of non-taxed income (e.g. you do some freelance work on top of your regular earnings), then you are required to submit a self-assessment tax return. Your taxable income is calculated from 6 April to 5 April the following year. The deadline for submitting this is 31 January the following year, so for example if you were self-employed between April of last year and the beginning of April this year then you have to submit your tax return by 31 January next year.

For those who run a limited company the process is slightly different. For most limited companies, the ‘year-end’ comes at the end of the month in which the company was first incorporated.  Some companies may choose to do their accounts over a calendar year, or to align with the corporation tax year which ends on 31 March. Regardless of when the year-end falls, the accounts need to be completed and filed with Companies House every year.

Limited companies registered in the UK are required to pay corporation tax, which currently stands at 19% of the company’s taxable profit. Business expenses and salaries are deducted from the profit, but dividends are not. You will need to complete an annual company tax return (a CT600 form) and the payment of your tax should be made to HMRC within nine months and one day of the accounting period you have previously specified.

One of the big differences between a company tax return and a self-assessment is that HMRC won’t tell your company how much you owe in corporation tax. The onus is on you to make accurate accounts and to correctly calculate your corporation tax payment. This is where the benefits of using a professional accountant really come to the fore.

FAQs

For more information on small business accounting, read our quick FAQs below.

Filing your accounts or paying your taxes late can lead to you being penalised by HMRC – which is something you definitely want to avoid.

If your annual turnover is more than £85,000 then you will need to register for VAT. Don’t worry though, this is a tax paid by your customers rather than an extra amount you have to pay.

When you are VAT-registered you are required to charge customers an extra 20% in VAT, which you add to your sales invoices. You then keep hold of this extra 20%, which you pay to HMRC less any VAT you have paid on purchases and expenses.

As VAT returns and payments are due every quarter, being VAT-registered comes with a lot more admin work for you to do – so it is advisable to seek help from an accountant.

There are some other things you need to consider when keeping accounts for your business:

  • PAYE: If you have employees then you are responsible for calculating their income tax and national insurance contributions. This is deducted from their gross salaries and paid to HMRC each month on their behalf.
  • Business rates: If you operate out of an office or you have a retail premises it is likely that you have to pay business rates. These are a bit like council tax, but for your business. Some premises are exempt, such as farm buildings, and if you work from home you are unlikely to be required to pay business rates as well as council tax.

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