Everything you need to know about setting up your finances in the beginning phases of your firm.
Creating a business is an exciting new chapter in your life, and it might be tempting to focus all of your efforts on the parts of being an entrepreneur that provides you the most satisfaction and fulfillment.
However, it's crucial to avoid doing so at the expense of the less exciting but no less critical facets of running a business, like managing accounts.
Yes, you ought to start organizing your finances before anything else. When handling taxes and cash flow, if your company's figures aren't managed properly, you could cause some major issues.
It takes time to get things done correctly, but your company will be in excellent shape if done perfectly.
-Review of the best UK small company accounting software
-There is always the option of doing bookkeeping manually or using cloud accounting software.
-Dealing with invoicing, recording expenses, monitoring outgoings, and paying personnel are all time-consuming tasks
If you don't have time to do everything yourself, you can pay someone to do it for you.
If you're going to use software, do some research to pick the best package for your needs. There are several significant players in the field, each with slightly different features and pricing.
Your company's yearly financial performance must be provided in a formal record and in a regulated format, which includes sales, costs, assets (such as stock or machinery or equipment), and amounts owed.
The deadline for submitting accounts varies depending on whether you are a sole proprietor or a limited corporation.
Because taxable income for sole traders is computed from 6 April to 5 April - and accounts are required to back up the tax return - it makes sense for sole traders (and partnerships) to have an accounting year that runs from 1 April to 31 March.
All UK limited companies must pay this, and the main rate is presently 19% on any profit that is not ring-fenced. A company tax return must be filed, with tax owed to HMRC within nine months and one day of the end of the accounting period.
Self-assessment income tax
Unfortunately, you must complete another form to compute your personal income tax on all of your income for the year (6 April to 5 April).
This form must be completed and filed, and any taxes paid by the 31st of January following the preceding 5 April tax year.
Income tax brackets
Everyone has a tax-free personal allowance of £12,570 (2022-23), while the next £37,699 of "basic rate" income beyond this personal limit is taxed at 20%.
Any income above this falls into the "upper rate" band (£50,271 to £150,000) and is currently taxed at 40%, increasing to 45% for incomes over £150,000.
Anyone earning more over £100,000 begins to lose their personal allowance: basically, if you earn between £100,000 and £125,000, you will be taxed at 60% (tax at 40% on income above £100,000 up to £125,000 + tax at 40% on personal allowance loss up to £12,500). And if you make more than £125,000, you lose your personal allowance entirely.
Furthermore, revenue from employment (salary and earnings) generates national insurance, which is due at various rates and levels.
Dividend income from a limited corporation is taxed at a reduced rate, but no national insurance is required.
The tax-free dividend allowance is £2,000
Basic-rate taxpayers pay 8.75 percent on dividends
Higher-rate taxpayers pay 33.75 percent on dividends
Additional-rate taxpayers pay 39.35 percent on dividends.
If your yearly turnover (sales) is £85,000 or more, you must register for VAT regardless of your business structure; registration is optional if your turnover is less than that.
You will charge your customers the usual 20% VAT rate, which means you must add 20% to your sales invoice values and keep this amount separate from what your clients pay you.
You will then be eligible to reclaim any VAT paid on business-related purchases and costs, and you will be required to pay HMRC the net sum of the two. VAT returns and payments are needed every quarter.
Making Tax Digital
Making Tax Digital (MTD) for VAT is new HMRC law that is part of a larger strategy to digitize all taxes for UK firms in the future. Over the next few years, the legislation will be introduced in stages.
All VAT-registered firms, regardless of income, will be required by law to keep digital records and file digital VAT returns using MTD-compatible software beginning in April 2022.
MTD for Income Tax and Self-Assessment will be implemented in April 2024 and will require all businesses, landlords, sole traders, and partnerships with an annual income of more than £10,000 to keep digital records, provide quarterly updates, and file income tax and self-assessment returns using MTD-compatible software.
MTD for Corporation Tax will be implemented in 2026 as the final stage of MTD. Nothing has been announced about how MTD will affect Corporation Tax.
Income tax and national insurance must be computed, taken from your employees' gross wages and salaries, and paid to HMRC on their behalf.
This is a monthly payment that is deducted from your employees' gross salaries, so there is no expense to your company.
Employees pay 13.25 percent national insurance, but income tax and NI kick if a certain wage threshold is achieved.
With all of the information above, you should be able to determine which course of action is best for you when it comes to bookkeeping and basic accounting - you can either manage it yourself or outsource it to an expert.
'As profits increase, it's prudent to have complete control and visibility over your business, ensuring that it's set up in a tax-efficient manner and that you can make solid management decisions based on reliable, timely information.'
Whatever you decide, you should make a choice as soon as possible and stick to it. What you should avoid is working for hours on your own and then giving up and passing it off to someone who can do it better.
Unfortunately, starting a business entails time-consuming and distracting admin in the form of bookkeeping, tax, and accounting. This can be aggravating.
These items, however, are critical in terms of keeping you secure and compliant in the eyes of the tax man, as well as offering vital information on which to manage your firm.
The money that comes in will grow over time. As profits increase, it is prudent to have complete control and visibility over your business, ensuring that it is set up in a tax-efficient manner and that you can make solid management decisions based on reliable, timely information.