Most people don’t start a business or run one because they want to spend all day managing their business accounts or updating accounting software. And, not everyone has a head for figures, which is why the prospect of having to crunch even the most basic numbers can fill some with feelings of dread.
Ensuring that your financial records (aka your accounts or books) are well maintained need not be arduous, although, if you do it yourself, it takes organisation, diligence and commitment. Setting aside regular time each week to update your books can make things much easier. Adopting a “little and often” strategy can ensure that updating your books/accounts doesn’t become something you try to avoid.
If you can afford it, instead of doing your own accounts or employing someone to do them, you could find an external bookkeeper. They might work at your base or remotely from their own. Bookkeepers often provide other services, such as generating quotes, invoicing or bank and petty cash reconciliations, etc.
You could also pay an accountant to complete your tax returns, file your accounts and advise you on tax efficiency and finance. Accessing external professional help can not only ensure that your bookkeeping and tax compliance is done to a high standard, but it can also free you up to get on with other things that you prefer or that contribute greater value to your business.
To save money, many business owners prefer to do their own basic bookkeeping, perhaps using an accountant to take care of more complex tax matters.
What’s the difference between bookkeeping and accounting?
This is a common question as there can be some overlap between the two skillsets and job roles. In this video from AAT, the key differences between bookkeeping and accounting are laid out.
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Bookkeeping involves recording, storing and retrieving when required financial transactions (ie money entering and leaving your business). Common bookkeeping tasks include:
recording and retaining purchase receipts
verifying and recording supplier invoices
bank and petty cash reconciliations
producing and sending invoices to clients/customers
monitoring payments and chasing when overdue
preparing profit and loss accounts, balance sheets and financial reports.
Accounting/bookkeeping software makes light work of many of these tasks, saving small businesses much time and money. Few businesses now use paper-based bookkeeping systems, which are more laborious and offer little added value.
You can only charge VAT if your business is VAT-registered. If your sales exceed the taxable turnover threshold – currently £85,000 a year – your business must become VAT-registered. You can only apply to deregister if your turnover goes below £83,000 a year.
Via a VAT return, which usually must be filed each quarter, VAT-registered businesses must report to HMRC all VAT they’ve charged and paid. If more VAT has been charged than paid, the difference must be paid to HMRC. If more VAT has been paid than charged, you can reclaim the difference.
To work out how much VAT you will need to pay for the current tax year, use our VAT Online Calculator.
Corporation Tax basics
Private limited companies (ie businesses that have been incorporated via Companies House) must keep records about the company itself (eg directors, shareholders and company secretaries), as well as detailed financial and accounting records.
You must pay your Corporation Tax bill nine months and one day after the end of your accounting period (usually your financial year), but you may have two accounting periods in the year you set up your company.
As well as being a director, you’re a company employee, so you must pay income tax through the company’s PAYE scheme (see below). Tax is also payable on dividends paid to company directors.
Income tax and National Insurance contributions are deducted from your earnings via your business or company PAYE scheme. They are then paid to HMRC. Tax is also payable on benefits in kind received by employees.
If you’re self-employed (ie a sole trader), you (or your accountant) must complete a Self Assessment tax return. Self Assessment is the system HMRC uses to work out how much Income Tax you must pay. This is based on your annual business profits – not how much you’ve paid yourself. Income Tax allowances and rates, as stated previously, apply (see above).
You don’t need to register for PAYE if none of your employees are paid £123 or more a week (2021/22) and they don’t receive additional expenses and benefits, have another job or get a pension. But, payroll records must be kept for all employees.
PAYE deductions are determined by an employee’s tax code and National Insurance category letter, as well as pension contributions and student loan repayments child maintenance payments, if applicable. An employee’s pay for PAYE purposes includes tips, benefits, bonuses, commission and statutory maternity or sick pay.
Employers who fail to pay the right PAYE deductions to HMRC when required risk interest and penalty payments. Employers are legally responsible for making sure PAYE tasks are completed properly – even if they outsource them to someone else.
The payroll software that your business uses must be able to report PAYE information in real-time to HMRC. Your business must maintain accurate PAYE records and tell HMRC about any relevant changes regarding your employees. Visit gov.uk to find out more about employer’s PAYE obligations.
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