8 min read
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.
However, by law, businesses must maintain accurate financial records, detailing all sums entering and leaving that business. Records must be retained for six years and HMRC can ask to see them, to verify your tax return figures, to ensure that your business pays the right amount of tax. HMRC can visit your business to check your financial records, and if they’re not accurate and complete, it can lead to financial penalties.
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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.
Investing in good cloud-based accounting software can also make the job much easier and save you time and money, while enabling you to better understand how your business is performing, control your finances and keep your cash flow healthy.
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.
by AAT
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.
Bookkeeping involves recording, storing and retrieving when required financial transactions (ie money entering and leaving your business). Common bookkeeping tasks include:
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.
VAT (Value Added Tax) is a transaction tax levied on the sale of most goods and services. VAT-registered businesses charge VAT on VAT-able goods or services and can reclaim VAT they’ve paid on products and services they’ve bought.
You can only charge VAT if your business is VAT-registered. If your sales exceed the taxable turnover threshold – currently £90,000 a year – your business must become VAT-registered. You can only apply to deregister if your turnover goes below £88,000 a year.
The standard rate of VAT is 20%, while there is a reduced rate (5%) for some goods and services and some others are zero-rated for VAT (eg most food and children’s clothes). Visit government website gov.uk to find out the VAT rate for specific goods and services.
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.
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.
Before its financial year-end, a private limited company must prepare full (“statutory”) annual accounts, as well as a Company Tax Return, so that it’s Corporation Tax liability can be calculated and paid. The Corporation Tax rate payable on company profit is 19%. A company may be able to claim allowances and reliefs to reduce its Corporation Tax bill.
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.
The standard Income Tax Personal Allowance is £12,570; you do not pay income tax on this (unless you earn more than £100,000). The basic rate of income tax (20%) is payable on earnings between £12,571 and £50,270; a higher rate of 40% is payable on earnings of £50,271 to £150,000. The additional rate of income tax (45%) is payable on earnings over £150,000. Tax bands are different in Scotland. You may be able to claim Income Tax reliefs.
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.
You can use our self employed tax calculator to work out roughly much you’ll be paying.
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).
Any other income you earn must also be reported in your Self Assessment tax return. You can file your return online. HMRC has strict deadlines for submitting your Self Assessment tax return and paying money due. Penalties are payable for late submission of your tax return or payment of your bill (plus interest).
PAYE (Pay As You Earn) is the system by which employers can calculate and deduct Income Tax and National Insurance contributions (NICs) from their employees’ earnings, which must then be paid to HMRC (usually each month).
You don’t need to register for PAYE if none of your employees are paid £123 or more a week (2024/25) 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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