The Essential Guide to Starting Out in Business

guide-startingoutinbusiness

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Overview – Starting a new business?

This essential guide summarises the main things you need to know before starting a new business.

1.         Types of Business

It is essential for anyone starting a business to select the right business type at the start. There are some significant differences between running a business as a limited company and as a sole trader/partnership. Getting this decision wrong could mean you end up paying more tax than you should.

There are essentially 2 business types  

  • Limited Company
  • Sole Trader / Partnership (if business has 2 or more owners).

Whichever one is selected you are required to inform HMRC within three months of starting up.

Key differences

  • Legal Status: A limited company is a separate legal entity, whilst with a sole trader or partnership there is no distinction between the business and yourself.
  • Limited Liability: Your liability in a limited company is limited to the amount of money you put in, whereas for a sole trader there is no restriction. All your assets are (including home) at risk.
  • Running cost: The set up, admin, payroll and accountancy costs are higher with a limited company.
  • Bank: A limited company must have its own bank account whereas it is not a requirement for a sole trader. They can still use their personal bank account.
  • Accounts & Tax Return: A limited company must file Annual Accounts and a Corporation Tax Return every year, the sole trader does not. All directors of a limited company and sole traders must file a personal tax return.

2.         Paying Yourself

Limited Company: The money in the bank account belongs to the Company not you. Money can only be legitimately taken out in the form of (1) salary, (2) dividends and (3) reimbursement of expenses.

Where a salary is being taken for any employee (even if it is just for yourself) a payroll must be set up and operated on a monthly basis.

Sole Trader: The money in the bank account is yours and you can take as much or as little as you like.

3.         Taxation

Tax on Business Profits

Limited Company:

The Company pays Corporation Tax (small companies rate is currently 20%).

The director(s) may have to pay income tax on income earned but through tax planning we will minimise this.

Sole Trader

Pays Income Tax (current basic rate is 20%) & Class 4 NIC (current rate is 9% on profits of £7755 up to £41,450 and 2% over this ) on income over £7755 & must submit a personal tax return each year.

Note : As the profits of a business rise the lower tax rates of a limited company (20%) compared to a Sole Trader (29%) should generate bigger tax savings for that business if it were a limited company.

Payment of tax

Limited Company:

The Company pays Corporation Tax 9 months after the year end.

Sole Trader

Pays Income tax & class 4 NIC 10 months after the end of the tax year (31st January).

If the annual tax bill is more than £1,000 then the taxpayer is required to go into payments on account regime. This means that the taxpayer has to pay the tax in advance rather than in arrears. For instance the tax payments for say the tax year ended 5/4/14 would be due 31/1/14 and 31/7/14 and any unpaid tax due to 5th April 14 would be collected with submission of tax return on 31/1/15.

Note : Going into the payment on account regime can cause cashflow problems for growing sole trader businesses as they will have to pay the tax for both last year and this year in the space of six months.

VAT

VAT Registration: A business (either limited company/sole trader) must register for VAT if your annual sales are (or you expect them to be very soon) more than £79,000.

Voluntary Registration: If your sales are less than £79,000 you can voluntarily register for VAT – depending on individual circumstances we advise business owners that it is in their financial interest to do so.

Note : Businesses need to be aware that there are many different VAT schemes to select from. We help clients select the one which is right for their business as it can add thousands to a business’s profit and bank balance.

The issue of VAT is particularly complicated and is something we frequently advise our clients on in order to increase their profit and cash in the bank.

National Insurance

Limited Company : On earnings over the Personal Allowance the employee and employer pay Class 1 National Insurance of 12% (and 2% on earnings above £797 per week) and 13.8% respectively via the payroll.

Sole Trader: If the business operates a payroll for any employees then Class1 National Insurance has to be paid – as above. The owner though is exempt – instead they pay Class 2 National Insurance (currently £2.70 per week) and Class 4 National Insurance (currently 9%) on business profits currently over £7,755 to £41,450 and 2% above this.

3.         Book-keeping & Filing

As a general rule if an expense has been incurred for business reasons then it can be included in the business’s annual accounts and will offset against the income of the business.

Please be aware that certain expenses, including, home office, travel and mobile telephone are governed by different rules depending on whether the business is a limited company or a sole trader.

All businesses are responsible for keeping satisfactory books and records – for instance keeping original invoices and receipts as evidence that a legitimate business expense has been incurred.

Records must be kept for six years.

There are various deadlines by which Annual Accounts, Tax Returns, VAT Returns, Annual Payroll Returns must be filed. Be aware that late filing will result in the HMRC charging penalties and interest.

At KMA Accountancy we can help you every step of the way.  For more information give us a call on 0845 3370 572.

 

Disclaimer
This article is for general information only and no action should be taken, or refrained from, as a result of this information. Professional advice should be taken based on specific circumstances in each individual case. Whilst we endeavour to ensure that the information contained in this article is correct, no liability will be accepted by KMA Accountancy for damages of any kind arising from the contents of this communication, or for any action or decision taken as a result of using any such information.

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Get in touch

0161 410 0020
info@kmaaccountancy.co.uk

KMA Accountancy
Progress House
17 Cecil Road
Hale
Altrincham
Cheshire WA15 9NZ

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