At the beginning of 2019, 5.82 million small businesses were registered – an increase of 3.5% from the year before. Small businesses are becoming exceedingly popular due to rising unemployment levels and general job dissatisfaction with regimented corporate structure and politics.
Now, in 2020 and post-pandemic, with the world’s economy in the worst state in decades and unemployment levels exceeding those of the Great Depression, it’s expected that by 2021 small businesses will once again surge to new levels of popularity as people look to seize the moment and carve out new industries.
However, in the excitement and rush of establishing a new business and experiencing the freedom and joy that comes with being able to take pride in a profession you want to pursue, many people overlook the drudgery of accounting until it’s too late.
This quick guide will help you navigate how to manage your accounts as a small business whilst you get yourself established.
1. Bolster Your Bookkeeping: Manually or Virtually
Bookkeeping is perhaps the most intricate financial aspect of any small business, incorporating time consuming tasks like collecting and paying invoices, recording expenses, assessing outgoings and paying any employees.
Thankfully, if you are short of time to do this yourself whilst you work to establish all other aspects of your small business, there are a range of Quickbooks inventory management software available to make your bookkeeping process smoother.. Alternatively, if you’d rather have someone take care of your bookkeeping, you can hire a virtual, online bookkeeper to give you full, financial support. All you need to do is send your documents over and they will do the rest for you, accurately, safely and securely.
2. Annually Account
Your businesses annual accounts must be filed and submitted before a set date each year, and must include sales, costs, assets and any amounts owed.
Whilst limited companies can choose their accounting year start and end date, sole traders are calculated between the 6th of April to the 5th of April and therefore it often makes sense for anyone to set their financial year between the 31st of March and 1st of April.
In addition, most accounts and any tax returns must be presented before the 31st of January to Companies House, so by collating everything to the start of the year, it takes away the hassle of having any financial obligations to take care of at varying points through your working year.
3. Take Care of Taxes
There are three different types of taxes to be aware of. Whilst this is overwhelming at first, an accountant can offer you advice and assistance with preparing, filing and assessing any of the below. Also, smart accounting software for small-scale businesses would be great for tracking your expenses properly, generating reports, and managing and preparing your taxes.
Corporation Tax is paid by all UK limited companies, no matter their size. The current tax rate is 19% on any profit generated, but recent legislation in conjunction with the Coronavirus pandemic suggests that for the year 2021/2022, this figure could be recalculated to encourage the survival and establishment of more businesses – so it is worth keeping up to date on.
Corporation Tax returns must be completed with its tax due for payment to HMRC within nine months and one day of your businesses accounting period.
Self Assessment Income Tax:
Self Assessment Income Tax is the calculation of any personal income tax accrued on your income for an annual period between the 6th of April and 5th of April.
The form must be completed, filed and any tax owing paid by the 31st of January, following on from the previous 5th of April tax year.
Income Tax is tax owed for certain bands of income that you acquire. There are four different rates depending on how much you earn annually.
Rate one for those earning £12,500 or under is tax-free. The next ‘basic rate’ of £37,449 is taxed at 20%. Above the basic rate, a ‘higher rate’ is set for those earning between £50,000 and £150,000 and is taxed at 40%, rising to 45% for any income over £150,000.
Incorporated into this is also a Personal Allowance. The Personal Allowance is the amount of income each individual, whether director or employee, is entitled to receive tax-free each year. Those whose income falls into rate one do not need to worry about the personal allowance, as it is already tax free. However, anyone earning over £100,000 begins to lose their personal allowance at a set 40% tax rate, and if you are earning over £125,000 the personal allowance goes completely as you will be taxed 60%.
If you would like to know more about small business taxes, please click here.
4. Note Down National Insurance
National Insurance is also taken from employment, both salary and wages. Just like income tax, it has four different bands of rates, and the beginning rate is always tax free.
For a limited company, dividend income is taxed at lower rates but there is no national insurance to be paid. The dividend bands are as follows, with the tax-free dividend allowance being set at £2,000. After the tax-free, there is a ‘basic-rate’ of 7.5% on dividends. Next, a ‘higher-rate’ at 32.5% and in the highest category, ‘additional-rate’ taxpayers must pay 38.1% on dividends.
5. Vouch for VAT
Whether you are a small limited company, or a sole-trader, whatever your business structure being registered for VAT is essential. Registering for VAT is compulsory if your annual turnover or sales exceed £85,000, but registration is optional if your turnover is below the threshold.
VAT registration means charging customers the standard 20%, and this must be added to the sales invoice values, then kept aside from the amount your customers pay.
You are able to reclaim any VAT paid on business-related purchases and expenses, and the net amount of the two must be paid over to HMRC each quarter.
Whilst this information can feel overwhelming at first, the further your business progresses the more the accounting side of the startup will become familiar. However, for businesses who are just starting out, it is often a good idea to look into avenues of help, assistance and advice in order to make the process more efficient and simplistic on the initial financial setup.
Over time, with increasing expenditure and income it is wise to have knowledge, control and visibility of your business to make sure that it’s set up in a tax-efficient way, allowing you to enjoy the day to day work without needing to worry about making incorrect decisions, or being caught for financial loopholes.