Can you manage your small business accounts for free?

While running your own business can be extremely rewarding, maintaining and managing your accounts frequently requires a significant amount of time and money – two resources that newly self-employed individuals and business owners frequently lack. This begs the question: Is it possible to manage your accounts effectively for free?

When the lightbulb went off in your head about being your own boss, we doubt that spreadsheets, calculators, and receipts, or paying for a high-street accountant were the pieces of the puzzle that excited you.

However, if you’re a freelancer, contractor, or small business owner looking to cut costs and boost productivity, you may be pleasantly surprised to learn about a new bookkeeping services offered solution.

How to manage your small business’s accounts

Bookkeeping

It takes time to get this right, but when done properly, your business will thrive.

There is always an option, and bookkeeping can be performed manually or through the use of cloud accounting software.

Various tasks, such as processing invoices, recording expenses, monitoring outgoings, and paying employees, can take a significant amount of time.

If you lack the time to complete the task yourself, you can hire someone to assist you.

Annual financial statements

Your business’s annual financial performance must be documented in a formal record and adhere to a prescribed format – this includes sales, costs, assets (such as stock, machinery, or equipment), and amounts owed.

Accounts are due on a different date depending on whether you are a sole trader or a limited company.

While you can choose the end date of your accounting year, because taxable income is calculated on a 6 April to 5 April basis for sole traders – and accounts are required to support the tax return – it makes sense for sole traders (and partnerships) to have an accounting year that runs from 1 April to 31 March.

Accounts must be completed prior to the following 31 January in order to be used to complete your self-assessment tax return due on that date.

Limited companies can more or less choose their accounting year to suit themselves and their business, but they must still complete and file accounts with Companies House each year.

Taxation of corporations

All UK limited companies are required to pay this, and the standard rate is currently 19% on any profit generated that is not ring-fenced. A corporation tax return must be completed within nine months and one day of the accounting period, with tax due to HMRC.

Income taxation by self-assessment

Unfortunately, you must complete another form to calculate your personal income tax on all of your income for the year (6 April to 5 April). This form must be completed, filed, and any applicable tax paid no later than the 31 January following the previous tax year ending on 5 April.

Tax rates on income

Everyone is entitled to a tax-free personal allowance of £12,500 (2020-21), and the next £37,449 of “basic rate” income is taxed at 20%.

Any income above this threshold falls into the “higher rate” band (£50,001 to £150,000) and is currently taxed at 40%, increasing to 45% for earnings over £150,000.

Anyone earning more than £100,000 also loses their personal allowance: effectively, anyone earning between £100,000 and £125,000 is taxed at 60% (40 percent on income over £100,000 up to £125,000 plus 40% on personal allowance loss up to £12,500). And if you earn more than £125,000, your personal allowance is completely eliminated.

Additionally, national insurance is deducted from employment (salary and wages) income at various rates and thresholds.

Dividend income is taxed at a lower rate in the case of a limited company, but no national insurance is required.

Dividends are tax-free up to a maximum of £2,000 per year.

Dividends are taxed at 7.5 percent for basic-rate taxpayers.

Dividends are taxed at 32.5 percent for higher-rate taxpayers.

Dividends are taxed at 38.1 percent for additional-rate taxpayers.

VAT

Regardless of the structure of your business, you must register for VAT if your annual turnover (sales) exceeds £85,000 – registration is optional if your annual turnover is less than that.

You will charge your customers at the standard VAT rate of 20%, which means that you must add 20% to the value of your sales invoices and set aside this amount from the money you receive from your customers.

You will then be able to claim any VAT paid on business-related purchases and expenses, and you will be required to pay HMRC the difference between the two. Quarterly VAT returns and payments are due.

Taxation in the Digital Age

Making Tax Digital (MTD) for VAT is new HMRC legislation that is part of a larger initiative to eventually digitise all tax in the UK. All VAT-registered businesses with annual VAT-able sales greater than the annual VAT threshold (currently £85,000) are now required by law to maintain digital records and file digital VAT returns using MTD-compatible software.

The majority of businesses must comply with this requirement for VAT periods beginning on or after 1st April 2019, and approximately a million businesses in the United Kingdom are required to submit their VAT returns under the new system.

HMRC’s new digital VAT rules – six steps to properly submit tax returns

PAYE

Income tax and national insurance contributions must be calculated, deducted from your employees’ gross wages and salaries, and remitted to HMRC on their behalf.

This is a monthly payment that is deducted from the gross salaries of your employees, so there is no cost to your business.

Employees pay 12% national insurance, but both income tax and NI kick in once a certain earnings threshold is reached.

Weekly earnings cap Equivalent to one year

Secondary Threshold – earnings below this threshold are not subject to NICs. £8.840 £170

£184 £9,568 Primary Threshold

Earnings above the Primary Threshold but below the Upper Earnings Limit are taxed at a rate of 12 percent. £967 £50,270

Earnings in excess of the Upper Earnings Limit are taxed at a rate of 2%.

Employer’s national insurance is charged at a rate of 13.8% on gross salary, subject to certain thresholds – this is not deducted from their salaries and thus represents a real, additional tax cost to your business.

Further Reading: The Value of Bookkeeping Software for Small Businesses

Self-employed sole traders pay different rates of national insurance contributions:

Contributions to National Insurance by self-employed individuals in 2021-22

Profitability threshold for the year The rate of Class 2 NICs 4th class The rate of NICs

Profitability threshold – Earnings below this level are not subject to NICs. £6,515 £3.05 0%

Profits Cap Reduced £9,568 £3.05 9%

Profit Cap £50,270 £3.05 2%

Changes to IR35 taxation

HMRC will bring thousands of freelancers who are effectively full-time employees into PAYE in an effort to combat what the taxman refers to as “disguised employment.” From April 2020, responsibility for determining the tax status of self-employed contractors will be transferred from the contractor to the company that hires them. Numerous freelancers will be required to wind up their personal businesses prior to IR35 being rolled out to the private sector.

What comes next?

‘As profits grow, it’s prudent to maintain complete control and visibility over your business, ensuring that it’s tax-efficiently structured and that you can make sound management decisions based on accurate, timely data.’ Whatever course of action you take, you should aim to make a decision quickly and adhere to it. What you should avoid is spending hours attempting to complete the task on your own and then surrendering to someone who can do it better.

Unfortunately, starting a business entails time-consuming and distracting administrative tasks such as bookkeeping, tax preparation, and accounting. This can be a source of frustration.

These items, however, are critical, both in terms of keeping you safe and compliant with the tax man and in terms of providing valuable information with which to run your business.

The money that comes in will increase over time. As profits increase, it’s prudent to maintain complete control and visibility over your business, ensuring that it is tax-efficiently structured and that you can make sound management decisions based on accurate, timely data.