Want to know how to manage your accounts and bookkeeping while you focus on your business as a sole trader? Here we explore how to find the right software for your business and some of the best platforms on the market

As a sole trader, having the right accounting software is key to optimising the day-to-day running of your business by saving you hours of work and giving you more time to focus on higher-priority tasks. This type of software can also help you cut your tax bills and reduce the risk of making mistakes. Some even make it easier to form a limited company if that’s the direction you want to go in.

With all that in mind, this article offers advice on what you can do to better manage your accounts and bookkeeping, and how to find the right accounting software, looking at some of the best packages on the market.

Here’s what we’ll cover:

• What is bookkeeping and why you should prioritise it
• First steps when managing your accounts as a sole trader
• How to find the right accounting and bookkeeping software
• What taxes do sole traders need to file?
• What records do I need to keep?

What is bookkeeping and why you should prioritise it?

Bookkeeping is the process of keeping accurate records of the money that your business spends and receives. To keep accurate records, sole traders need to log every receipt, invoice, and bill. As the owner of a business, this becomes your legal responsibility.

Accounting also covers the more general process of managing your accounts, including strategic planning.

To keep on top of these outgoing and incoming expenses, sole traders usually need to make daily logs to avoid missing payments or making errors. Any errors you do make could incur fines and, in more serious cases, legal action as you’re not protected by a Limited Liability Company (LLC).

First steps when managing your accounts as a sole trader

The first steps to take are registering your business with HMRC and going over the rules for running your company. These rules include:

• Keeping records of your incoming and outgoing expenses
• Submitting a yearly Self Assessment tax return
• Paying income tax on your profits
• Registering for VAT (providing you’re over the threshold)
• Pay Class 2 and 4 National Insurance
• Handle your debts

HMRC also randomly carry out random checks on business to ensure they’re complying with the taxation regulations. 

Once you’ve got your taxes in check, you can start thinking about saving some money. Some things you can claim expenses on and reduce your tax bill include:

• Computers, IT equipment, and WiFi costs
• Rent
• Your phone bills
• Business travel and motor expenses 

You can also claim expenses on anything you buy for the business, including coffee, business meals, and train tickets. However, if you want to claim any of these expenses, you’ll need to be careful to request a VAT receipt.

How to find the right accounts and bookkeeping software

When it comes to software, there are so many benefits to using a digital accounting and bookkeeping platform. It can help you keep accurate records, add new supplier information to the system, offer a better chance of receiving on-time payments due to automated systems and help with submitting VAT returns to HMRC.

But how do you pick what software is right for you? Here are a few things to consider when making your decision:

Cost and functionality

Typically, these types of software are relatively evenly priced, but they’re not always the same price for the same features. So, check what’s included in your package before deciding on a particular software and choose the most cost-effective option with the right functions to save you time, effort, and money in the long run.

Simplicity

It’s great to have sophisticated software to help you run your business, but the program needs to be simple enough to use. Accounting and bookkeeping should be something you can do without too much effort or stress, so if your software is making it harder for you, it might not be the right one for you.

If you’re using a platform that seems a bit too complicated for what you need, it might be that that it is aimed at VAT-registered companies with taxable turnovers of more than £85,000. These programs can be unnecessarily complex for sole traders, so it’s usually more sensible to opt for a pared-down version.

A software that can evolve with you

It’s all well and good using a platform that works for you today, but will it work for you next year or in five years? It’s always worth investing in longevity, so choosing a platform that offers upgrades, should you need them, is a wise choice.

Free trials

Free trials are essential to take advantage of when choosing your accounting software, as they give your platform a test run without making an actual commitment.

If you have the option to experiment with some software or a handful of different platforms, doing so is something we recommend.  

Self-employed expenses calculator

Knowing how you can claim back some money on your taxes is the best way to save some money for your company, but it isn’t always so straightforward. That’s why choosing software that offers a self-employed expenses calculator is so important.

What taxes do sole traders need to file?

Now that you know how to find the right accounting software for you, you’ll need to think about what you’ll need to log. 

As a sole trader, you’ll need to pay:

• Income tax: Payable on your business profits at the end of each tax year.
• National Insurance: You’ll have to pay your quarterly Class 2 National Insurance, which goes towards your state pension and any additional Class 4 payments
• VAT: You’ll only need to register for VAT if your turnover is more than the threshold (which is currently £85,000)
• PAYE: PAYE is only applicable to sole traders who take on staff members.

What records do sole traders need to keep?

As a sole trader, keeping records of your finances and business functions is a legal requirement, and HMRC may ask you to provide a detailed breakdown of these figures, including:

• Business sales and income, including invoices, and receipts
• Your personal income
• Your business expenses
• Applicable VAT records if you’re registered
• Staff PAYE records, if applicable 

Find the software for you, today

Online, you’ll find plenty of accounting and bookkeeping software options, so many that sometimes it can make it difficult to pick one. 

If you’re unsure where to start, it’s worth exploring the accounting software from Sage. With five plan options ranging from free to £44 per month, there’s an option for just about any business, and there’s room to grow if your company expands. 

The “Start” plan is most suitable for self-employed individuals and sole traders. You’ll be able to create and send sales invoices, track what you’re owed, calculate and submit VAT, and have help to make sure you’re ready for Making Tax Digital. You’ll also benefit from automatic bank reconciliation. If you upgrade to a “Standard” or “Plus” membership, you’ll also be able to:

• Manage and submit CIS
• Run advanced reports
• Send quotes and estimates
• Forecast cash flow
• Manage purchase invoices
• Automate receipt capture
• Log multi-currency banking and invoicing
• Manage inventory

Get started with Sage Accounting software and see how easy it is to manage your sole trader finances.

The post How to manage your accounts and bookkeeping as a sole trader appeared first on Small Business UK.

If you’re a sole trader or a self-employed business owner, you might be wondering what expenses you can claim to help you reduce your Self Assessment tax bill.

Getting your head around your tax bill can be tricky for many business owners, but there’s more to it than just figuring out what you owe. You also need to figure out how much you’re owed in return as a result of your business expenses. 

In this article, we’ll help you understand what expenses you might be entitled to and how you can proceed to claim them.

Here’s what this article covers:

Expenses you can claim

Additional expenses you can claim while working from home

How do I track my expenses throughout the year?

How to claim your expenses

Expenses you can claim

Something that tends to surprise business owners is that there is a long list of company expenses for which you can claim tax reimbursement. Claiming these expenses can save companies a great deal of money on their tax bill, but so many business owners and sole traders are unaware of what they can claim. 

Here are some examples of what you might be able to claim:

• Office equipment or tools— this includes laptops, desktop computers, printers, and software (used for less than two years).
• Stationary— this includes paper, pens, pencils, stamps, envelopes, printer ink, and cartridges. 
• Communications— this includes equipment used for electronic communications, like telephone and mobile handsets.
• Phone and internet—this includes your phone and internet bills. However, if your phone and internet are used for personal and business use, you need to divide the costs reasonably to determine how much tax you can claim back.
• Professional and financial services— this applies to any financial or professional services you outsource pertaining to your business, such as advice from accountants or lawyers. You can also claim costs if you hire surveyors or architects for your business.
• Business bank account charges— if you have a business bank account, you can claim on bank, overdraft, and credit card charges, as well as interest on business loans. 
• Pension contributions— while pension contributions are not a business expense, they are eligible for tax relief if you do make contributions. 
• Travel— this applies to travel and accommodation booked for the primary reason of business and does not apply to personal trips. 
• Staff and employee costs— this includes staff salaries, benefits, pensions, and bonuses, as well as agency fees and employer National Insurance contributions. 
• Car and vehicle costs— those who use their vehicle for business can claim money on gas, insurance, repairs, and a mileage allowance. You can also claim parking and hire charges.
• Food and clothing— claims regarding food and clothing can include uniforms you require for work, entertainment costumes where necessary, laundry fees if used to clean special or protective clothing, and food purchased while on business. 
• Marketing and advertising— this can include hosting and maintaining your website, as well as membership fees for subscriptions to professional journals or trade organisations. 
• Materials— you can claim tax back on items you resell, raw materials used to create your goods, and the direct costs associated with producing goods. 

Additional expenses you can claim while working from home

If you run your business from your home, there are some additional expenses you can. These include:

• Heating bills
• Electricity bills
• Council tax
• Mortgage interest rates

However, you can’t claim the full amount of these costs as your home is predominantly used for personal reasons. Therefore, you need to divide the costs up to determine how much you are using for business reasons. One way you might divide your bills is according to how many hours per day you are working from home and how many rooms in your home you use for business reasons.

How do I track my expenses throughout the year?

To ensure you can report accurate figures on your Self-Assessment tax return, it’s important to track your expenses throughout the year.

While this is something you can take care of yourself via the means of a spreadsheet or on paper, it’s highly advisable to use dedicated accounting software or hire a professional to make sure everything is in order.

Additionally, if you’re a small business owner or sole trader making more than £50,000 per year, you’ll be legally required to produce digital copies of your expenses from April 2026 onwards due to the soon-to-be adopted Making Tax Digital mandate.

How to claim your expenses

Once you have figured out exactly what you can claim, how much you’re entitled to and added all your expenses together, you might be thinking, “Now what?”

The next step is to make your claim against your tax bill. You can do so during your Self-Assessment tax bill submission.

Once you reach the “Self-employment” section of the tax return submission process on the HMRC website, you will have the chance to fill out your income figures for the year. On the screen titled “Total Expenses for Your Company”, you will be given the chance to supply figures for various expenses such as travel and equipment. Simply supply the correct figures to submit your expenses claim.

You can either submit as one total amount or provide a detailed breakdown.

Final thoughts

Understanding what types of expenses you’re entitled to and how much you can claim off your tax bill can be exceptionally beneficial when it comes to your cash flow. And, when you understand the ins and outs of the process, the end of the tax year doesn’t seem so stressful.

If you’re still feeling overwhelmed by the self-assessment process, hiring an accountant or investing in some effective accounting software might be worth consideration. Discover how Sage Accounting software can help you manage your self-employed finances and expenses and help make self assessment a breeze.

The post Self-employed allowable expenses you can claim appeared first on Small Business UK.

Running a business isn’t a walk in the park, and business owners often have a million things to do at once. Outsourcing some services (like your accounts) is a great way to free up some time.

Hiring an accountant is commonplace for medium to large-sized businesses, but many small business owners and sole traders overlook how useful financial assistance can be.

An accountant can save you valuable time and also share important knowledge and information with you about your taxes and accounts—including how you could save yourself some money) .

However, while it might be simple to find an accountant, making sure you hire a good one takes more consideration. You might they can all do the same thing for your small business: save you some time and effort. But finding one that understands you and your company is more important than you realise.

In this article, we’ll explain why investing in financial aid is worthwhile and how you can find a good accountant.

How can an accountant help your business?

What’s the difference between an accountant and a bookkeeper?

How to find a good accountant

When should you get an accountant?

How can an accountant help your business?

If you’re wondering whether hiring an accountant is worth it for your small business if not turning over millions of pounds, then it’s time to understand exactly how they can help you.

You might be an expert in running a business and know everything there is to know about the industry you operate in, but that doesn’t mean you’re a financial genius too. As experts in all areas of finance, including tax, and compliance, accountants can take care of your business’s financial admin while also providing essential advice. 

A good accountant will not only ensure you file your accounts correctly and stay away from tax troubles, but they can also create business plans, forecast your cashflow, help you win loans and grants, and elevate your business. They’ll also help you claim as much as possible on your expenses, leaving you more money to plough into your company.

So, if you think investing in saving money on your taxes, freeing up time to focus on yourself or your company, help with business planning and cashflows, and assistance applying for and winning loans is worth it, then you should consider hiring an accountant.

What’s the difference between an accountant and a bookkeeper?

Before you find an accountant, it’s good to understand how they differ from bookkeepers, as the two roles can overlap.

While bookkeepers and accountants do perform some similar roles, accountants are generally considered to have more of a 360-degree view of all things business finances and how they impact your company’s future. Bookkeepers, however, focus more on the present day to keep your accounts and books in order.

Bookkeepers also cannot file corporation tax returns, prepare management accounts, business plans, or cashflow forecasts, nor can they calculate your capital gains tax. These processes should be left to an accountant.

How to find a good accountant

Now that you know what an accountant can offer and how they differ from other finance professionals, you’re probably wondering how to find an accountant that will suit your company. 

Your accountant will oversee your finances and even play a role in making your business decisions, so the person you hire must be the right fit. But, with so many accountants to choose from, what do you need to consider before taking someone on?

Do they have experience working with other companies like yours?

If your business operates within the insurance industry, but your accountant only has experience working for companies in the beauty industry, they might not be the right choice for you. Ensuring your accountant has at least a basic understanding of your industry, current trends, and your customer base is essential for optimal results.

What accreditations and certifications do they have?

You can usually guess the type and extent of experience an accountant has just by looking at their accreditations and certifications. For example, chartered accountants usually have more experience, as they’re required to have completed a minimum amount of exams, degree-level study, and work experience. Possessing this accreditation might indicate that a particular accountant is more knowledgeable. 

A certified accountant, however, is less qualified than a chartered accountant, but that’s not to say their services aren’t worthwhile. Certified accountants have still earned a qualification alongside years of industry experience and can provide excellent advice. They are also likely to be slightly less expensive.

What services are they offering?

When you hire an accountant, you want value for your money, so look for those who offer above-and-beyond basic services. Even if you’re not sure if you need all services on offer, it’s better to have more options than less. 

How much do they cost?

While having access to as many services as possible gives you a great advantage, don’t pay more than what you can afford. Hiring an accountant is well worth it, but spending all of your money to do so, isn’t. 

Make sure you’re making the right decision by asking these 5 questions at your initial consultation:

What are some examples of other businesses you serve in this industry?

How will you keep in touch?

How often will we have check-ins?

Do you have any specialities?

How could you help my business grow?

When should you get an accountant?

No hard and fast rule tells you exactly when you need to hire an accountant, and you can make that decision whenever you see fit. However, as soon as you start to feel out of your depth when it comes to filing your taxes or keeping track of your books, it’s probably time to start thinking about it. 

Hire an accountant when you begin to feel like the amount of work it takes to file your taxes and keep accurate records of your incomings and outgoings is too much. If the work is beginning to eat into your spare time or takes precious time away from working towards your business goals, then you know you’re ready.

They can then advise on the next steps to ensure your business has the best processes and accounting software in place for successful financial management. 

The post Is it worth hiring an accountant as a small business? appeared first on Small Business UK.

Submitting your Self Assessment tax return isn’t always a straightforward process, and many small business owners find paying their tax bill confusing. 

There are so many factors to consider when it comes to your tax bill, including payment on account, that it often leaves both new and established business owners paying more than they need to, or submitting a return that isn’t quite accurate. 

In this article, we’ll clear up any confusion you might have when it comes to your payment on account fees, including what it is, how it works, when you need to pay, and how you can make sure you’re not paying more than you need to. 

For any specific questions you might have, you can jump straight to a particular section or read on for the full piece.

What is payment on account?

When do I pay?

How does HMRC payment on account work?

How do I reduce payment on accounts?

What is payment on account?

Payments on account are fees you pay towards your self assessment tax return twice a year. The payment on account process was designed by HMRC to help businesses pay taxes and easily stay on top of the payments.

The amount your payment on account fee costs is calculated by HMRC using your previous year’s tax return. You’ll pay this fee in two instalments per year. You can calculate how much you’ll pay per instalment by halving your previous year’s tax bill. 

However, since business earnings and expenses can vary from year to year, the amount you owe for your payment on account will also vary. So, if your payments based on the previous year’s bill don’t cover the bill for the current year, you’ll make a “balancing payment”.

Alternatively, if your tax bill is determined to be under £1,000, you’ll fall beneath the payment on account threshold and, therefore, not be required to pay.

When do I pay?

There are a few dates to keep in mind when thinking about your payment on account bill.

Every year, you will pay the first instalment of your payments on account by midnight on January 31.

How does HMRC payment on account work?

To explain how HMRC payment on account might work for you, here is an example of the process. 

If during your first year of trading, HMRC calculated that you owed £500 in tax, due to be paid by January 31 of the following year, you would fall under the payment on account threshold (£1,000) and not be required to pay.

Then, if during the following tax year, you earned more money and your tax bill came to £2,000, you would then be required to pay a payment on account fee for the year. So, in addition to your £2,000 tax payment, you’d also owe a payment on account fee of £1,000 (half of your year’s tax bill). This would leave you to pay £3,000 in total in January and a further £1,000 by July 31st. 

However, if your profits in the third year of trading are lower than the previous year, for example, your tax bill comes to £1,800, you’d be owed a £200 refund the following January as you overpaid your payment on account costs.

Then the following tax year, your 1st and 2nd payments would be £900 each.

How do I reduce payment on accounts?

A common complaint business owners have regarding the payments on account process is that the advance payments are often overestimated.

Since your income can change year on year, sometimes your tax bill will be lower. However, because your payment on account bill is calculated based on your previous tax year and is payable in advance, you could be charged more than you owe.

If you know your tax bill is set to be lower than the previous year, you can avoid overpaying by contacting HMRC and requesting to reduce your payments on account.

To do so, log into your HMRC account, select “view your latest self-assessment return” and then select “reduce payments on account”. There you can opt to fill out either an online form or print a form to send by post.

However, do be careful when requesting to reduce your payment on account fees because if you’ve incorrectly calculated your taxes and end up underpaying, you’ll not only have to make up the difference, but you’ll also pay interest on the outstanding balance.

Final thoughts

Hopefully, this guide to payment on account has helped you understand how the process works and what is expected of you.

But, if you’re still struggling to understand payments on account, an accountant can help you and even process your bills for you.

Alternatively, if you’re looking to manage your small business finances yourself, find out how you can get started with Sage Accounting software and stop admin from soaking up your time and keep driving your profitability.

The post What is payment on account and how do I pay it? appeared first on Small Business UK.

For most business owners, having autonomy over their time and lifestyle is one of the most attractive benefits of working for yourself. However, there are some aspects of running a business that compromise your ability to take full advantage of that benefit, the most prevalent (and unavoidable) being finances. 

Not everyone is a finance and accounting wiz by nature, so processing tax returns, keeping track of incomings and outgoings, payroll and saving cash where possible can become a lengthy and sometimes complicated process. 

Fortunately, it doesn’t always have to be this way, as some helpful accountancy and payroll software and practices can make the process less complicated and less time-consuming, leaving you more time to focus on growing your business or enjoying your free time. 

In this article, we’ll highlight:

• How to keep your records clean
• How to develop a seamless payment process
• How reports could help you
• Software that could save you time and energy

Keep your records clean

The first step to simplifying your payroll and accounting process is to streamline your bookkeeping.

Not only will this help save you time in the long run, but it’ll also make sure you remain in line from a legal perspective.

To maintain accurate books, you’ll need to:

• Record all your business transactions
• Backup your files and records
• Bank reconciliation
• File your tax returns
• Keep on top of your invoices

To make these processes as simple as possible:

• Consider going paperless and automating your systems
• Educate your employees (if you have any) on the process
• Categorize your income and expenses
• Make a dedicated time in your schedule to work through these processes

Develop a seamless payment process

Your people are the backbone of your business, making sure it’s running smoothly daily. So, making sure they’re paid on time and accurately should be a top priority.

And, while you can’t eradicate the risk of mistakes entirely, these tips should make your pay run as error-free as possible. 

• Start your pay run early: Giving yourself more time to process your pay run gives you a better opportunity to rectify potential mistakes.
• Update your employee details regularly: It might be your employee’s responsibility to let you know of any changes (such as their address or bank details), but sending out reminders on a semi-regular basis is a great reminder and a way to prevent frustrations. 
• Keep an eye on your cash: Paying your staff should be your top priority, so always make sure there’s cash to do so. 
• Run training on pay slips: Helping your employees understand their pay slips and the financial breakdown is a great way to avoid confusion and save time spent explaining deductions. 
• Use effective payroll software: The right software can automate a lot of these processes, removing the risk of human error and saving you time. 

Gain insights with reports

So, your records are clean, and your payroll process is seamless; what’s next? 

Collecting insights from your financial data is an excellent way to better understand your business and make better informed and confident decisions that help grow your company and propel your finances. 

There are numerous reports you could opt to run, but here are some of the most insightful options that could help make a difference.  

• Profit and loss reports
• Nominal activity reports
• Trial Balance reports
•  Balance sheet reports

Software that could save you time and energy

While these processes are essential to the running of your business (and some a legal requirement), spending hours of your week trying to understand and perfect them could be taking valuable time away from you or your business.

To significantly cut down how long you spend on your accounting, financial and payroll procedures, make use of dedicated and sophisticated software that can not only automate these systems but also provide real-time insights.

Some of the other benefits of using accounting software are:

• Time efficiency
• Seamless pay runs
• Real-time clarity over your processes
• Simpler compliance
• Pay slip creation
• Reporting
• Digital records
• Accounting and payroll sync

The bottom line

This article breaks down how you can better manage your business’s accounting and payroll processes and make more time for yourself and growing your business.  

For a deeper understanding of how to implement the tips and suggestions in this article and how they could benefit you, Sage has released an easy-to-use guide featuring 10 additional tips to make accounting and payroll that bit easier. 

The post How to spend less time on accounting and payroll appeared first on Small Business UK.

Providing mileage allowance for employees who drive for work has become more popular in recent years. But with HMRC’s many rules, it can be confusing for employers and employees alike how this process works. This article will guide you through the main rules you should be aware of as an employer paying out mileage allowance, as an employee receiving the payments, and as self-employed – claiming deductions.

Mileage allowance for employees

My employees use their private vehicles for travelling for business. Do I have to provide them with mileage allowance payments?

As an employer, you are not obliged to pay a mileage allowance to your employees. However, many choose to reimburse their employees for business mileage, as anything paid under or at the same level as the approved mileage rates from HMRC is not reported to the authority.

Your company can choose to pay the exact amount of mileage allowance as stated by HMRC, less or more than it.

If you pay more per mile than the approved rate, the excess sum will be considered as personal benefits for your employee and they’ll have to pay tax on that amount.

To pay out MAPs (mileage allowance payments), your employees should hand in a mileage log, documenting their business travel for the month in line with HMRC requirements.

It is important to keep the provided mileage logs on file. If your company is audited, you’ll likely have to prove that you paid the correct amount of mileage allowance to your employees.

>See also: 8 of the best electric cars for small business leasing

How do I know how much mileage allowance to pay my employees?

You can pay your employees any mileage allowance you wish. However, the recommended rate is 45p per mile (HMRC, 2023).

It is also important to note that a rate higher than 45p per mile will be rates on excess.

So, if your employee drives 70 miles you can figure out their mileage allowance using this equation:

70 x 0.45 = 31.5

What should my employees know about mileage allowance?

Employees should know if they are paid MAPs by you and at what rate per mile. It is important they are familiar with HMRC’s requirements for a mileage logbook too.

Your employees should be aware that depending on the rate you reimburse them with, they might have to pay tax or be able to claim a tax deduction.

You pay your employees a mileage allowance based on HMRC’s approved mileage rates:

In this case, employees receive the full amount of mileage allowance. They will not be taxed additionally and they cannot claim a tax deduction on their business driving.

You pay your employees less than the rate approved by HMRC:

If employees are paid less, they are not taxed on the amount they’ve received for driving, and they can claim Mileage Allowance Relief (MAR).

You reimburse your employees more than the approved HMRC rate per mile:

Any payments over the approved amount per mile will be considered a personal benefit for your employees and it will be taxed as income.

What tax deduction do my employees get if I don’t reimburse them for their business mileage with the full amount?

Your employees can claim Mileage Allowance Relief (MAR). MAR is based on HMRC’s advisory rates. If you reimburse your employees with 45p per mile, they will be able to claim an extra 5p for each mile driven that year as tax relief.

Mileage allowance for self-employed

I am self-employed. What rules do I follow when I’m driving for my business?

As self-employed, you can claim mileage with one of two different methods – simplified vehicle expenses, or actual vehicle costs.

Claiming mileage with the actual vehicle costs method means you’ll have deductions for every penny you’ve spent on business mileage for the year. You should keep all receipts of your business travel spending. Vehicle costs you can claim include:

• Fuel
• Insurance
• Car maintenance and servicing
• Breakdown cover
• License fees
• Parking

This method might be beneficial for you if your vehicle expenses are high due to e.g. expensive insurance or road tax. Keep in mind it can be a time-consuming way of preparing for your annual tax claims.

The simplified expenses method is great for avoiding lengthy calculations and receipt collection. With it, you use a flat rate set by HMRC to calculate your mileage allowance claim. The flat rate covers all vehicle costs for your business driving such as fuel, maintenance, depreciation, insurance, road tax etc.

Other expenses you can claim

As a self-employed person, you can also claim any accommodation and meals, as well as travel with other vehicles (e.g. airfares) when on a business trip.

How to claim mileage allowance as self-employed

No matter which method you choose for claiming mileage expenses as self-employed, you can claim it through your self-assessment tax return. You won’t need to submit any proof of the claim but keep your receipts and mileage logs for five years in case of an audit.

What are the current mileage rates set by HMRC?

The mileage rate set by HMRC has remained the same since 2011. This has not changed for over a decade, which is astonishing, given inflation and higher living costs. The current mileage rates are used for both mileage relief for employees and mileage deductions for self-employed.

The rates for 2023 are as follows:

• Cars and vans – 45p for the first 10,000 miles, 25p for every mile over 10,000 driven miles for business
• Motorcycles – 24p per mile regardless of the miles driven
• Bicycles – 20p per mile regardless of the miles driven

What should a logbook contain, according to HMRC’s requirements?

 A mileage logbook is considered HMRC-compliant if it includes the following information:

• The date of the trips
• The start and end address of each trip, including postcodes
• The distance driven

Additional for employees:

The total amount of mileage allowance that your employer has paid out to you.

How do I keep an accurate logbook?

There are a few options for keeping a logbook – on paper, as a spreadsheet, or through an app. Paper logs and spreadsheets require you to manually input the needed information about your mileage. Using a mobile application has become popular in recent years for the ease of not having to do exactly that. Driversnote, for example, is available on both AppStore and Google Play.

Mobile applications use GPS to track your driving and automatically create a logbook. If choosing an app, look for one that creates HMRC-compliant records that can be used for both mileage allowance payments and mileage allowance relief.

To learn more about mileage allowance, go through this HMRC mileage guide, or visit HMRC’s website.

Katerina Nikolova is a marketing and communications specialist at Driversnote

Further reading

Is it better to buy or lease a car for your small business?

The post Mileage allowance in the UK – what is it and how does it work? appeared first on Small Business UK.

Bookkeeping is the bane of every small business owner’s life. Sitting down for an hour or an afternoon a week, going through invoices and receipts, can be incredibly tedious. After all, you didn’t go into business for yourself to become a bookkeeper. Happily, there are plenty of small business software options out there to make life easier.

Bookkeeping vs accounting

Bookkeeping is the process of keeping accurate records of the financial activities of your business – in simplest terms – keeping track of the money your business makes and spends and keeping tabs on how much cash you’ve got in the bank.

Accurately and regular bookkeeping is important because it helps a small business to:

• Keep track of overall profitability as well as understanding which parts of the business are less profitable than others
• Ensure it has accurate records as proof of expenses incurred and to help support and submit its self-assessment returns
• Plan for tax liabilities and avoid unnecessary penalties
• Budget for expenses
• Manage cashflow
• Keep track of revenue to ensure you register for VAT when you need to
• Calculate their VAT liabilities (if they’re VAT registered)

If you’re VAT registered, unless you register for Flat Rate VAT, your bookkeeping will get a bit more labour intensive as you’ll need to track and record VAT paid on relevant expenses.

Accounting is the process of interpreting financial records and forecasting business performance in the coming months and years.

This helps you understand how well your business is performing whether purely financially or in overall growth. It’s best to work with a chartered accountant, as they can often become your most trusted adviser.

How can bookkeeping software help my small business?

There are many small business bookkeeping software solutions out there to help you keep track of what’s coming in and out. And when you consider the time spent doing bookkeeping on paper or using generic spreadsheets, the money you save using up-to-the-minute HMRC-compliant software means it pays for itself.

Best accounting software if you’re a sole trader – Here, we explore how to find the right accounting software for you as a sole trader, along with some of the best platforms around

Which software features to look out for

When deciding what software to choose, consider how much support is offered, as this will be key if bookkeeping is new to you.

Features to look out for to see if they’re included as part of the package:

• Digital record capture – Some solutions allow you to use your smartphone or desktop scanner to capture everything that’s on a receipt and automatically upload it into your system.
• Automatic reconciliation – Software that integrates directly with banks automatically reconciles transactions between your bookkeeping system and your bank accounts.
• Mobile functionality – Being able to access the software on your smartphone means you can do bookkeeping on the move. Especially helpful if you’re a tradesman or someone who works out of the office.
• Tax automation – Software should be compliant with the latest HMRC regulations.
• Secure cloud storage – Cloud based software will securely store and back-up your data, meaning you don’t have to worry about it being lost.
• Ability to upload receipts or invoices easily – or integrate with something like Dext or Hubdoc. To save time you should looking for uploads that include optical character recognition (OCR), which means it reads the invoices and pre-populates lots of fields.
• Integration capabilities – make sure that your small business bookeeping software integrates with other software you use, such as your EPOS system or inventory tracker.
• Budgeting – if you can put a budget in your accounting software, you’re more likely to keep tabs on how well your business is performing against expectations.
• Reports – does the software offer easy-to-understand reports?
• Is it Making Tax Digital compliant? – HMRC has a list of software providers its MTD reporting works seamlessly with.

Try a free trial – how does it feel? Is it intuitive? What is the support like?

Top 5 accounting software providers for UK small businesses – Looking for a new accounting software provider for your UK small business? Here are 5 accounting software providers to choose from

Small business bookkeeping software

ClearBooks

Overview:

Tim Fouracre, then an accountant at KPMG, founded Clear Books in July 2008 working out of his spare room. He had developed a simple web-based double-entry accounting system to look after the accounts of the small web-development company he was running in his spare time. He then realised there would be thousands of small UK businesses looking for that same kind of software. Fouracre spent nine years building up Clear Books before stepping down as CEO in 2017.

Today, Clear Books provides clear and simple cloud accounting and payroll software to over 13,000 small businesses in the UK.

Pros:

• Simple to use
• Designed for British businesses
• UK-based
• Support team sits alongside developers
• Value for money

Cons:

• Some functions can be overly complicated
• Not suitable for enterprise level businesses
• Continual UI updates do frustrate some customers

Pricing:

Clear Books is offering 50 per cent off for the first three months before rising to the list price.

Small business is £13pm + VAT with 50 per cent discount for three months if you sign up during one-month free trial

• Invoice/quote creator
• Bill & receipt tracking
• Bank feeds and uploads
• Reports (e.g. P&L)
• Dividends tool

Medium is £28 per month and has everything in the Small Business package plus:

• MTD VAT reporting
• CIS

Large is £34 per month and has features everything in the Medium package plus:

• Project accounting
• Multi-currency
• Expenses
• Fixed assets

FreeAgent

Overview:

British-owned accountancy software package FreeAgent began life in Edinburgh, Scotland in 2007 and quickly became one of the UK’s fastest-growing technology firms, raising over £1m through crowdfunding site Seedrs and ultimately going public in 2016. Royal Bank of Scotland group bought the company in 2018 and now offers complimentary FreeAgent to business customers of NatWest, Royal Bank of Scotland, Ulster Bank and small business banking app, Mettle. Around 150,000 businesses currently use FreeAgent.

Pros:

• Clear and easy-to-use interface
• Very good customer support
• Puts bank and PayPal transactions into bookkeeping form and tagged with what each transaction is, whether it’s a sale or stock purchase, makes for easy bookkeeping

Cons:

• Expensive compared to entry-level packages offered by FreshBooks Lite (£6), Zoho Books Standard (£10) and Clear Books Small Business (£13)
• Users complain some features are buggy, with glitchy transaction automation, which means you have to compare the actual balances show on PayPal or your bank with the FreeAgent bookkeeping balance to doublecheck accuracy

Price:

FreeAgent is offered for free if you retain a business bank account with NatWest, Royal Bank of Scotland or Ulster Bank, or make at least one transaction per month through a Mettle bank account.

Like Clear Books, Xero, Sage and others, offers a 30-day free trial.

Sole trader is £19 per month plus VAT.

• Dashboard
• Business Insights with Radar
• Estimates
• Invoicing
• Expenses
• Projects
• Time Tracking
• Payroll
• Banking
• VAT filing
• Self-Assessment

Partnerships and LLP is £24 per month plus VAT

This package includes everything in Sole Trader apart from self-assessment.

Limited company is £29 per month plus VAT

This package includes everything in Sole Trader plus end of year filing.

FreshBooks

Overview:

Back in January 2003 FreshBooks founder Mike McDerment, who at the time was running a design studio, lost hours of work, having saved the wrong invoice using Word and Excel. He decided there had to be a better way and over the next fortnight coded what became the beginnings of FreshBooks.

He and two colleagues then spent the next four years working out of McDerment’s parents’ basement building the company, which basically adapted double-entry bookkeeping for the internet age but more importantly was specifically designed for small business.

Today, the Toronto-based company has over 500 employees and more than 24m people in over 160 countries have used FreshBooks.

FreshBooks offers nearly all of the features every other accounting software platform offers but with one caveat: you have to pay to add clients outside of those allowed on its two lower-priced plans. The basic plan means you can only use FreshBooks with five clients.

Another issue that might be off-putting for a UK small business owner is that telephone support only works during US daytime (8am to 8pm EST/-5hrs GMT), which means that no telephone help is available before 1pm.

Pros:

• Specifically designed for small businesses
• Colourful and intuitive UX

Cons:

• Lower-level plans have client limits
• Charge for additional users
• Phone support only during US business hours (8am to 8pm EST/-5hrs GMT)
• Lacks functionality larger businesses need

Price:

FreshBooks is currently offering 50 per cent off for the first six months of a subscription.

Lite: £6 per month + VAT

Lite includes:

• Send unlimited invoices to up to 5 clients
• Track unlimited expenses
• Send unlimited estimates
• Get paid with credit cards and Direct Debit (transactions capped at £4)
• Track sales tax & see reports
• Access anywhere on iOS and Android
• VAT return filing for HMRC Making Tax Digital

Add-ons:

+ Advanced payments (£15/mo)

+ Team members (£8 per user per month)

Plus: £11+ VAT

All Lite features plus:

• Send unlimited invoices to up to 50 clients
• Automatically track expenses
• Send unlimited estimates and proposals
• Get paid with credit cards and Direct Debit (transactions capped at £4)
• Set up recurring billing and client retainers
• Run business health reports
• Double-entry accounting reports
• Invite your accountant
• Access anywhere on iOS and Android
• Mobile mileage tracking
• VAT return filing for HMRC Making Tax Digital

Add-ons:

+ Advanced payments (£15/mo)

+ Team members (£8 per user per month)

Premium: £17.50 per month + VAT with first three months 70 per cent discount

All Plus features plus:

• Track project profitability
• Customize email templates with dynamic fields
• Customize email signatures
• Lower your transaction cap to £2 when you get paid via Direct Debit
• Automatically track expenses
• Automatically send late payment reminders and bill late fees
• Send unlimited estimates and proposals
• Get paid with checkout links
• Set up recurring billing and client retainers
• Run business health reports
• Run financial and accounting reports
• Invite your accountant
• Access anywhere on iOS and Android
• Mobile mileage tracking
• VAT return filing for HMRC Making Tax Digital

Add-ons:

+ Advanced payments (£15/mo)

+ Team members (£8 per user per month)

Select: speak to FreshBooks customer service

All Premium features plus:

• Send unlimited invoices to an unlimited amount of clients
• Start with 2 team member accounts
• Get a dedicated account manager
• Get help migrating from other software
• Set up your account with custom onboarding services
• Remove FreshBooks branding from client emails
• Lower your transaction cap to £2 when you get paid via Direct Debit
• Contact us with a dedicated support number
• Set up recurring billing, subscriptions and client retainers
• Securely accept credit cards over the phone
• Automatically track expenses
• Automatically send late payment reminders and bill late fees
• Invite your accountant
• Run business health reports
• Run financial and accounting reports
• Access anywhere on iOS and Android
• VAT return filing for HMRC Making Tax Digital

Add-ons:

+ Advanced payments included

+ Team members (£8 per user per month)

Intuit Quickbooks

Overview:

Parent company Intuit was founded in 1983 and the QuickBooks brand was introduced in 2002, with QuickBooks Online following two years later. Today, QuickBooks has 7.1 million users across 225 countries.

Nifty features include a client portal, where customers can view, print and pay invoices and a customer relationship management (CRM) system, which helps you keep on top of your customer database.

Where Intuit QuickBooks stands out is the quality of its reporting, with punchy snapshots of how your business is performing financially. Its reporting facility is ahead of rivals such as Xero when it comes to customisation.

Pros:

• QuickBooks’s user experience (UX) is easy to understand and pleasing to the eye
• QuickBooks is mindful of scaling businesses and its software can have anything up to 25 users
• Professional bookkeepers rate the professionalism of QuickBook’s reports and its bank reconciliation features

Cons:

• QuickBooks can be difficult to navigate with some features hidden in settings
• It’s a steep learning carver for anybody who’s not technically literate
• There have been complaints that QuickBooks online is still buggy with long waiting times for telephone customer support

Price:

QuickBooks is offering a 75 per cent discount for the first three months.

Self-employed is £2.50 per month rising to £10.

• Prepare for self-assessment
• Income tax estimates
• Separate personal and business transactions
• Manage income & expenses
• Send invoices
• Free onboarding session
• Free chat messaging support

Simple Start is £3.50 per month, rising to £14.

• Making Tax Digital ready
• Submit VAT directly to HMRC
• VAT error checker
• Prepare for self-assessment
• Incomt tax estimates
• Manage income & expenses
• Send invoices that can be paid in one click
• Forecast cash flow
• Free onboarding session
• Get free phone & chat

Essentials is £6 per month, rising to £24.

All Simple Start features plus:

• Accept and make payments in different currencies
• Track employee time
• 3 users

Plus is £8.50 per month, rising to £34.

All Essentials features plus:

• Manage stock
• See the profitability of every project
• Budgeting
• 5 users

Advanced is £17.50 per month, rising to £70.

All Plus features plus:

• Restore company data
• Run advanced reports
• Business analytics with Excel
• Batch invoices
• Customise user permissions
• Automate workflows & data
• Manage employee expenses (beta)
• 24 users

Sage Business Cloud Accounting

Overview:

Another UK-based payment-processing platform, Sage began life in 1981 when its founder got in touch with Newcastle University students asking them to help him develop an automatic accounting processes program. Jump forward nearly 40 years and Sage now has 13,000 employees across 23 countries serving over three million businesses using its software. Sage says that every month it helps UK firms create over 500,000 invoices, process 700,000 transaction and sell 1.5 million products.

Like all the other small business accounting software packages listed here, Sage is cloud based and links seamlessly to your bank account for real-time reporting.

Features it offers include:

• Estimates and invoicing
• Payroll
• Corporation Tax calculator,
• Multi-currency support
• Bank account connectivity
• Stock management
• Linked to Stripe payments processing system

Pros:

• Sage Business Cloud Accounting’s bottom Accounting Start tier is well priced, simple and easy to navigate.

Cons:

• Sage Business Cloud Accounting’s user experiences looks dated compared with other small business accounting software and some of the terms it uses are clunky, better suited to accountants than small business owners
• Its inventory app is not the best choice if you have a business dealing with hundreds of product lines

Price:

Sage is offering its small business accountancy software for 50 per cent off for three months if bought upfront.

Start for sole traders and microbusinesses: free for 1 month then £14 per month + VAT

• Create and send sales invoices
• Track what you’re owed
• Automatic bank reconciliation
• Calculate and submit VAT
• Be Making Tax Digital Ready for VAT

Standard (includes invoicing and cash flow management): free for 1 month then £28 per month + VAT

Everything from Start plan plus:

• Manage and submit CIS
• Run advanced reports
• Send quotes and estimates
• Forecast cash flow
• Manage purchase invoices
• Automate receipt capture

Plus (adds multicurrency invoicing and inventory management): free for 1 month then £36 per month + VAT

Everything from Standard plan plus:

• Multi-currency banking and invoicing
• Manage inventory

Xero

Overview:

Xero describes itself as “beautiful accounting software” offering unlimited users with free upgrades. It offers an ecosystem of over 1,000 third-party apps and 300 plus connections to banks and other financial partners.

Established in 2006, New Zealand-based Xero has over 3.7m subscribers in 180 countries and is used by over 16,000 accountants.

Like QuickBooks, Xero offers the following as standard:

• Connects straight to your bank account enabling automatic reconciliation
• Generates quotes and invoices that customers can pay online
• Manages purchase orders, bills and supplier payments digitally
• Helps track stock
• Keeps your account up to date as you buy and sell
• Customisable reports
• Range of apps in marketplace including Shopify, Stripe, PayPal and Square

However, you have to pay extra as bolt-ons if you want to do your payroll on Xero or enable staff to submit expenses, track expense claims.

Pros:

• Xero is popular with small businesses and especially sales-oriented businesses that need basic stock management built in.
• Its usability, features, extendibility, and network of “Xero certified” accountants make it one of the best small business accounting websites available.

Cons:

• The Starter plan is extremely limited, offering an improbably low allowance of monthly invoices and quotes.
• The drop-down menus on Xero can be a bit clunkier than, say, QuickBooks.
• And its reporting functions can be more difficult to navigate. For example, unlike QuickBooks, Xero lacks any facility to bunch together creditors and debtors by name in its reports, an omission which mystifies some accountants.
• Xero has improved its functionality dramatically, but these improvements have come at the cost of dropping built-in payroll with its monthly subscription plans. And you must subscribe to its most expensive tier if you want multicurrency transactions.
• There is no telephone customer support and users complain that the online-only support has deteriorated, despite the monthly subscription hike.

Price:

Xero offers a 30-day free trial period giving you time to choose the right tier.

Starter is £14 and described as good for new businesses, sole traders and the self-employed.

• Send quotes and 20 invoices
• Enter 5 bills
• Reconcile bank transactions
• Submit VAT returns to HMRC
• Capture bills and receipts with Hubdoc
• Automatic CIS calculations and reports
• Short-term cash flow and business snapshot

Standard is £28 and described as good for growing small businesses.

• Send invoices and quotes
• Enter bills
• Reconcile bank transactions
• Submit VAT returns to HMRC
• Capture bills and receipts with Hubdoc
• Automatic CIS calculations and reports
• Bulk reconcile transactions
• Short-term cash flow and business snapshot

Premium is £36 per month and described as good for all businesses.

Only the top-tier Premium option handles multiple currencies, along with everything in the Standard package.

Zoho Books

Overview:

Indian software company Zoho has more than 80 million users for its suite of products, which include HR management and enterprise-level workplace collaboration tools.

Zoho Books is not a dedicated small business bookkeeping software app per se but part of this Zoho suite of apps, of which its CRM is the best known.

Zoho Books describes itself as the preferred bookkeeping software for small businesses, offering:

• Multi-user interface
• Transaction approvals
• Auto-scan
• Data backup
• Zoho integration
• MTD compliance

Pros:

• Free plan offer
• Plenty of features including excellent invoicing, inventory management, workflow rules and a capable mobile app
• 24/5 phone and live chat support in all paid plans

Cons:

• Limited third-party integrations
• Complex user interface
• Highest-tier plan still caps user numbers at 15

Price:

Zoho Books offers an unbeatable Free entry-level package for businesses below £35,000 per year turnover:

• 1 User + 1 Accountant
• Manage Clients
• Manage Invoices (Up to 1,000 per annum)
• Customer Portal
• Online/Offline Payments
• Automate Payment Reminders
• Multi-lingual Invoicing
• Credit Notes
• Recurring Invoices
• Expenses & Mileage Tracking
• Add Multiple Bank and Credit Card Accounts
• Import Bank and Credit Card Statements
• Bank Rules & Reconciliation
• Chart of Accounts & Sub-accounts
• Manual Journals
• Reports
• Audit Trail
• Invoice Customization
• Taxes
• Payment Gateways
• Schedule Reports
• Email support

Standard is £10 per month and offers everything in Free plus:

• Invite 3 users
• Manage Invoices (Up to 5,000)
• Recurring Expenses
• Connect and fetch bank & credit card feeds via bank feeds provider
• Predefined User Roles
• Bulk Updates
• Transaction Locking
• Custom Views
• Custom Fields
• Reporting tags
• Taxes
• Payment Gateways
• 10 Custom Reports
• Custom Financial Report Generator
• Email, chat and phone support

Professional is £20 per month and offers everything in Standard plus:

• Invite 5 users
• Track Project Expenses and Invoice
• Project Tasks
• Timesheet and Billing
• Sales Approval
• Retainer Invoices
• Bills
• Payments Made
• Vendor Credits
• Recurring Bills
• Sales Orders
• Purchase Orders
• Purchase Approval
• Basic Multi-currency Handling
• Automatic Exchange Rates
• Currency Adjustments
• Stock Tracking
• Price Lists
• Landed Costs
• Custom Roles
• Timesheet Approval
• Timesheet – Customer Approval
• Contextual Chat
• Retainer Invoices for Projects
• Project Profitability
• Journal Templates
• Tasks
• Recurring Journals
• Workflow Rules (Up to 10)
• 25 Custom Reports

Premium is £25 per month, integrates with Twilio, and offers everything in Professional plus:

• Invite 10 users
• 3 Branches
• Custom Domain
• Vendor Portal
• Multi-Transaction Number Series
• Budgeting
• Custom Buttons
• Validation Rules
• Related Lists
• WebTabs
• Workflow Rules (Up to 200)
• 10 Custom Modules
• 50 Custom Reports
• Cashflow Forecasting Report
• Record Locking

Elite costs £85 a month and offers everything in Premium plus:

• Unlimited Custom Reports
• Advanced Multi-currency Handling
• Advanced Inventory Control
  • Integrate Shopify Stores (Up to 2 stores)
  • Warehouse Management (Up to 5 warehouses)
  • Serial Number Tracking
  • Batch Tracking
  • Print Shipping Label
  • Shipment Tracking

Ultimate costs £165 per month and offers everything in Elite plus:

• Invite 15 Users
• 25 Custom Modules
• Advanced Analytics
  • View real-time reports and dashboards
  • Analyze and track key financial metrics
  • Customize reports and dashboards
  • Analyze Zoho Books data along with other data sources
  • Collaboratively create reports with colleagues
  • Export and print reports as excel or PDF
  • Embed reports in web sites/applications
  • Records/Rows (5 million)

What is the best small business bookkeeping software?

You’ll never be short of accounting software providers to choose from.

While it can be tempting to go with the cheapest or free one, make sure you do your research first, so you can find something which not only helps you keep accurate records but also helps you save time and make better business decisions.

Begin by asking fellow small business owners which bookkeeping software they use, what they like about it, and whether they’d recommend it to others.

The advantage of going with small business bookkeeping software such as Xero or Quickbooks is that you’ll never be short of people who know how to use it. And if you’re a NatWest or Royal Bank of Scotland customer, having FreeAgent bundled with your business account is a compelling offer. As is the free Zoho Books offer if your business turns over less than £35,000 a year.

Further reading

What are the best business bank accounts in the UK? – Make the right decision about your small business bank account, whether you’re just starting out or you’re more established

The post Small business bookkeeping software appeared first on Small Business UK.

Accounting software packages have become an essential tool for all modern businesses, of whatever size and type, and there is now a wide range of vendors to choose from. The key to purchasing a suitable platform is to find the right match to your company’s needs.

To help you with this important investment, check out this list of the top 5 accounting software providers for UK small businesses.

How is this top 5 composed?

These accounting software providers are selected based on the business type for which they were developed, (expert) reviews and the possibilities and functions.

Important functions include pending payment reminders, linking with the Tax Authorities (for electronic VAT and IB returns), the use of mobile apps for submitting receipts and other documents, and time registration.

Choice for accounting software providers: what should I take into account?

The range of accounting software providers is wide. How do you make a wise choice? There are a number of things that you have to take into account when choosing.

1. Your business form

Accounting programs aim for specific business forms. Some are more suited for self employed people and some are better for those handling more complex financial challenges for bigger companies. So look for software suppliers that have a broad customer base within your business form.

2. Number of billable clients

Take a good look at the number of billable clients that can be used within the program. With a number of providers this is limited and you have to pay more if you want to send more.

3. Your budget

Usually you pay about 10 to 20 euros per month for a good accounting program. For a complex administration in which, for example, you also do stock management and have a lot of depreciation, you can look at an SME accounting program.

4. Integration with other software

Do you also use software for, for example, payments on your website or do you keep track of your customer contacts in a CRM package? If so, see if a link is possible. That makes it much more convenient.

Important functions

In addition to the above, you can select an accounting program based on the functions that are important to you. For example, think of:

• Bank link (for importing bank statements and linking to, for example, outstanding invoices)
• Sending payment reminders
• Link with the Tax Authorities (for electronic VAT and IB returns)
• Mobile app for submitting receipts and other documents
• Time registration (pay attention to how many ‘hour lines’ you can save
• Journey registration
• Profit and loss account
• Create quotations and convert them to invoices

Further Resources

Best accounting software if you’re a sole trader – what’s available on the market right now for the self-employed or smaller UK business.

The best accounting software for medium sized businesses – A look at accounts platforms suitable for UK-based mid-sized businesses.

9 myths about Making Tax Digital busted – An article to help clear up any remaining confusion about MTD.

The post Top 5 accounting software providers for UK small businesses appeared first on Small Business UK.

In 2014, the government introduced the Employment Allowance to give small businesses some relief on staffing costs.

It can give your business a real boost if you’re trying to grow. We’ll be looking at what the Employment Allowance is and whether your firm is eligible.

What is Employment Allowance?

Note that the allowance is per business, not per employee.

Employment Allowance allows employers to reduce their National Insurance liability by up to £5,000 per tax year. This means you’ll pay less Employers’ Class 1 National Insurance each time you run your payroll or until the tax year ends, whichever comes first. You can only claim against class 1 National Insurance if your allowance is up to £5,000.

The good news is that you can claim if your liability was less than £5,000 last year. In fact, you can claim Employment Allowance for previous four years, dating back to the 2018/19 tax year, but maximum thresholds were lower than they are at the moment.

Employment Allowance was:

• £4,000 each year between April 6, 2020 and April 5, 2022
• £3,000 each year between April 2016 and April 2020

What taxes does a business pay when employing staff? – Businesses that employ staff have an obligation to collect and pay taxes to HMRC in relation to that employment, as Emma Twynholm explains

Am I eligible?

You can claim Employment Allowance if you’re a business or charity – this includes community amateur sports clubs – if your employers’ Class 1 National Insurance liabilities were less than £100,000 in the previous tax year.

If you have or had more than one employer PAYE reference, the total Class 1 NI liabilities for your combined payrolls must be less than £100,000 in the previous year. You can only claim Employment Allowance against one of the payrolls.

You can also claim if you employ a care or support worker.

“If your business is eligible, you have up to £5,000 you can offset against any of your employer class 1 NI liabilities for the current tax year,” says Suzanne Gallagher, head of UK payroll at Employment Hero. “You can do this by simply reducing your monthly PAYE/NICs payment by employer class 1 NI until all the £5,000 allowance has been used. Most payroll software will do this automatically for you.”

It’s possible that you could be eligible for other schemes too. “If your class 1 NI is even lower [less than £45,000] you may be entitled to ‘Small Employers Relief’. This could allow you to claim back 103 per cent of parental pay for your employees – things like maternity and adoption leave,” Mark Hopkins, finance assistant at Balance, tells Small Business.

You don’t need to take Employment Allowance into account when calculating the threshold for Small Employers’ Relief.

As with other government support, take de minimis state aid into account as Employment Allowance now counts towards it for some businesses. “From April 2020 you need to check how much of any other state aid you have received as there is a limit for each sector and you cannot go above this,” says Gallagher. For the tax years 2018/19 and 2019/20, however, it doesn’t matter how much your employers’ Class 1 National Insurance liability was or how much de minimis state aid you received.

Non-eligibility

Payments to off-payroll workers are known as “‘deemed payments”. Class 1 liabilities on deemed payments don’t count towards the £100,000 threshold.

You also can’t claim if you’re a public body or your business does more than half of its work in the public sector. If you only have one employee paid above the Class 1 National Insurance secondary threshold or if the employee is also a director of the company, you won’t be able to claim.

Employees whose earnings are within the IR35 “‘off-payroll working rules”’ can’t be included in your claim. Someone who you employ for personal, household and domestic work (say a cleaner or a gardener) won’t count either. The only exception is for the aforementioned care or support worker.

How do I claim Employment Allowance?

“Claiming Employment Allowance is not an automatic process, but it is relatively simple,” Linda Wright, operations manger at PayEscape, tells Small Business. “It will need to be ‘re-applied’ for every tax year, as eligibility criteria may change or be updated.”

How you apply depends on whether you use your own payroll software or HMRC’s Basic PAYE tools.

If you use your own payroll software, put “‘Yes” in the Employment Allowance Indicator’ field next time you send an Employment Payment Summary (EPS) to HMRC. However, if your payroll software doesn’t have an Employment Payment Summary field, you can use basic PAYE tools.

If you use HMRC’s Basic PAYE tools, follow this step-by-step:

• Choose the correct name in the ‘Employer’ menu on the homepage
• Select ‘change employer details’
• Click ‘Yes’ in the Employment Allowance Indicator field
• Answer ‘Yes’ to ‘Do state aid rules apply?’ question if de minimis state aid rules apply to you. Otherwise, answer ‘No’ and select ‘State aid rules do not apply’.
• Send your EPS as normal

You’re not automatically entitled to the full amount – it depends on your employees’ NICs.

Five small business taxes you need to know about – Here, FreeAgent’s Emily Coltman presents five small business taxes that you need to know about

Calculating National Insurance contributions

Samantha O’Sullivan, policy lead at the Chartered Institute of Payroll Professionals, explains:

“As an employer, you must calculate class 1 National Insurance contributions [NICs] based on your employees’ pay. You’ll calculate primary class 1 NICs which are deducted from your employees’ pay; you’ll also calculate secondary class 1 NICs, which as an employer, you’ll cover the cost of. 

“So, let’s think about when employees and employers start paying class 1 NICs. Primary class 1 NICs, for your employee contributions, are deducted from employees once they’ve received £242 per week; £1,048 per month or £12,570 per year. However, employers will pay secondary class 1 NICs when employees receive a lower rate of pay; £175 per week; £758 per month or £9,100 per year. This means employers pay more class 1 NICs than employees. 

“The rates at which class 1 NICs are calculated differ for employees and employers, depending on the class 1 NICs threshold and will also differ depending on the employee’s NI category. In total, there are over 12 different NI categories, so I won’t get try and cover it here! To find out more information on NI rates, thresholds and categories, please review the Gov.uk pages.”

How do I stop my claim?

If you stop being eligible, select ‘No’ in the ‘Employment Allowance indicator’ field in your next EPS.

That said, you shouldn’t select ‘No’ just because:

• You’ve reached the £5,000 limit before the end of the tax year – this does not make you ineligible – you’ve just maxed out your limit for that tax year
• You’re no longer employing anyone – this allowance will stop at the end of the tax year

If you stop your claim before the end of the tax year (April 5), any allowance you’ve been given that year will be removed. You’ll need to pay any employers’ (secondary) Class 1 National Insurance due.

When do I claim?

Claim at any point in the tax year, just be aware that the earlier you claim, the earlier you’ll get your allowance.    

If you claim late and do not use your Employment Allowance against your employers’ Class 1 National Insurance liabilities, you’ll have to ask HMRC to do one of the following:

• Use any unclaimed allowance at the end of the year to pay any tax or National Insurance you owe (including VAT and Corporation Tax if you do not owe anything on your PAYE bill)
• Give you a refund after the end of the tax year if you don’t owe anything

When can I start using my allowance?

You can start using your Employment Allowance as soon as you submit your claim. HMRC won’t send you a confirmation letter for your allowance. If your claim is rejected, however, you’ll receive an automated message from HMRC within five working days.

Find out how much Employment Allowance you’ve used in your HMRC online account.

When your Employment Allowance counts as de minimis state aid

If you have included a business sector in your claim, HMRC will send a letter stating that your Employment Allowance counts as de minimis state aid.

Keep this letter as you might need it if you want to apply for other de minimis state aid.

More on employing staff

8 key things to do when employing people – Follow these steps to manage employment costs and ensure a productive relationship with new employees

The post Employment Allowance for small business appeared first on Small Business UK.

The VAT threshold is the volume of annual turnover at which businesses are required to register for value-added tax (VAT).

The current UK VAT registration threshold stands at £85,000. The Government has said that this threshold, in place since 2017, will remain unchanged until 31 March 2024.

VAT thresholds for previous years are as follows:

• 2014–2015 – £81,000
• 2015–2016 – £82,000
• 2016–2018 – £83,000
• 2019-2024 – £85,000

Once your business’s turnover reaches the VAT threshold, you have 30 days to register for VAT with HMRC. When this process is complete, your business has a extra responsibilities including:

• Charging VAT on your products or services
• Paying VAT on the goods or services supplied by your vendors
• Submitting your VAT return to HMRC every year
• Maintaining a VAT account and records

VAT registration

Registering for VAT is a legal requirement for businesses that exceed this threshold, and the threshold is reviewed regularly by HMRC.

You need to register for VAT if your small business has earned more than the VAT threshold within any 12-month period or if you expect your VAT taxable turnover to cross the VAT registration threshold within the next 30 days.

The 12-month period in question does not necessarily need to coincide with the tax year. You should regularly check whether your VAT taxable turnover for any given 12-month period has crossed the current VAT registration threshold.

Pro tip: Even if you have just crossed the £85,000 VAT registration threshold, you must register within 30 days of the end of the month in which you crossed the line. It is important to keep a close eye on your turnover on at least a monthly basis, particularly as you approach the threshold.

Is VAT threshold on turnover or profit?

The VAT threshold is measured on turnover. Your turnover is the total value of everything you sell that is not exempt from VAT.

VAT exempt goods and services include:

• Education and training
• Healthcare and medical treatment
• Funeral plans, burial or cremation services
• Antiques

Zero-rated goods and services include:

• Incontinence products, maternity pads, sanitary protection
• Books, magazines and newspapers
• Babywear
• Children’s clothes and footwear
• Cycle helmets

Different VAT rates

How VAT threshold is calculated

You can calculate your annual taxable turnover by adding together your total sales (excluding any VAT) across your products and services the last financial year (April to March).

For example, if you sold £60,000 worth of goods over 12 months and £30,000 worth of services, then your total VAT taxable turnover would be £90,000.

Because you have crossed the £85,000 VAT threshold, you must register for VAT and start charging it on applicable goods and services sold from that point onward.

Sole traders and VAT – Whether you pass the VAT threshold or register for VAT voluntarily, we explain everything you need to know about Value Added Tax

What if it’s just a blip?

It’s possible that your business will cross the VAT threshold but only on a temporary basis. Therefore, it’s possible to request your small business has a registration “exception”, which means you don’t need to register for VAT.

This VAT registration exception is something you must apply for – it’s not enough to say nothing and argue the case later.

Write to HMRC and explain the circumstances as to why your are applying for permission not to register. Reasons for not registering for VAT, even if you have crossed the VAT threshold, include:

• Crossing the VAT threshold was a one-off event
• That there’s no likelihood of your crossing the VAT threshold again in the near future

You will also need to supply supporting documents to support your case.

Pro tip: Even if HMRC accepts your application for a VAT exception, remember that it is a one-off and not an ongoing exclusion. You’ll still need to register for VAT if your turnover again exceeds the VAT threshold.

Registering for VAT voluntarily

You can still register for VAT voluntarily, even if your taxable turnover does not exceed the VAT registration threshold of £85,000.

The advantage of this is that you become cheaper if you’re customers are also registered for VAT. They can claim VAT back on whatever they buy from you, saving them 20 per cent compared to if you weren’t registered for VAT.

It is estimated that around 20 per cent of all VAT-registered businesses trade below the VAT registration threshold.

Also, if you’re just starting up and you know that you’re quickly going to hit the £85,000 VAT threshold, or that you will be mostly selling to VAT-registered businesses, you can claim your VAT on the costs of setting up – saving you money in the short term.

Do grants count towards VAT threshold?

Grant funding is typically outside the scope of VAT.

How do I pay VAT to HMRC?

Of course, you could just hold your nose and hand 20 per cent of your turnover over to the taxman but there are legitimate and official ways to reduce you VAT bill and smooth out payments to help cashflow:

• Flat Rate Scheme – If your annual turnover is less than £150,000, you may join this scheme to pay VAT to HMRC at a fixed-rate percentage of turnover, depending on industry. VAT rates under the Flat Rate Scheme range from 4 per cent to 14.5 per cent compared with 20 per cent standard rate. If you’re part of the Flat Rate Scheme, you must leave once your turnover goes above the compulsory deregistration threshold of £230,000.
• VAT Cash Accounting Scheme – This works similarly to regular cash accounting, where VAT is paid and recorded when money changes hands, rather than when an invoice is received. To join the VAT Cash Accounting Scheme, you must have a VAT taxable turnover of £1.35 million or less. There’s a compulsory deregistration threshold, and you must leave the scheme if your taxable turnover is more than £1.6 million.
• Annual Accounting Scheme VAT – Under the Annual Accounting VAT Scheme, businesses submit one VAT Return per year and make advance payments towards their VAT bill. You can join the scheme if your VAT taxable turnover is £1.35 million or less. Companies participating in the Annual Accounting VAT Scheme must leave when their turnover crosses the £1.6 million deregistration threshold.

How to stay under the VAT threshold

If you’re a tradesman especially, having to charge your customers an additional 20 per cent is not very palatable – it puts you at a disadvantage compared with rivals.

One way to stay under the threshold is to split your business into two or more separate businesses, according to Checkatrade, but each part of your company needs to offer different services to make the distinction clear. Having separate bank accounts for each business is also helpful.

Sole traders increasingly avoid charging VAT – Tens of thousands of small businesses deliberately stay small to avoid charging VAT, which means you have to hike prices if you wander over the £85,000 threshold

More on VAT

Import duty and zero VAT rated goods – If I want to import zero VAT-rated goods, will I still have to pay import taxes on them? Where can I find more information about this?

The post What is the VAT threshold? appeared first on Small Business UK.

In April 2023, the rates of corporation tax increased from 19 to 25 per cent. Small businesses that make a profit must pay corporation tax within nine months of their year-end, but not every business need pay the higher rate. There are many entirely legitimate ways you can reduce the profits your business makes and your corporation tax bill.

But be warned; HMRC takes a keen interest in the tax it believes a business should pay and any business that looks to push too hard to reduce the tax it pays may find itself under the taxman’s spotlight. Working with and taking advice from your accountant is important.

#1 – Keep profits under £50,000

Businesses that can keep their profits under £50,000 a year can escape the new 25 per cent rate, paying corporate tax at just 19 per cent. The 25 per cent rate only applies to businesses making profits of £250,000 or more, with a complex tapered rate applied for those businesses with profits between £50,000 and £250,000.

#2 – Make pension contributions

Making pension contributions directly from the business will reduce the amount of corporation tax paid. A company can, from April 2023, pay up to £60,000 a year into the pension pots of its directors, reducing the profits that are taxed. Remuneration packages for individuals must, however, be reasonable for corporation tax deductions.

It is possible to carry forward pension contributions over a three-year window, meaning that where trading differs each year and you were unable to take full advantage of the £60,000 allowance, it can be topped up over the subsequent three years.

Pension contributions have additional tax benefits too. Unlike dividends or salary, no income tax is paid on pension contributions unless thresholds are exceeded.

But, be warned. Pension contributions cannot exceed the income generated by the business. HMRC will want to make sure a business passes the ‘wholly and exclusive’ test, meaning that contributions are reasonable for the work being done. It is rare to fail this test, but it pays to check with your accountant before contributions are made.

#3 – Work-from-home allowances

The pandemic has changed the way we all work, yet for many small businesses or sole traders, a home office has long been the norm. If you work from home permanently or for part of the week it is possible to claim expenses that reduce company profits and the corporation tax paid.

If you work from home on a more regular basis there will be other costs, such as heating, lighting and broadband that can be claimed. These need to be realistic, reflecting private use, so unless you have, for example, an entirely separate broadband supply into a home office, you will not be able to claim the full cost.

#4 – R&D tax relief

Businesses that carry out research and development may qualify for valuable R&D tax relief, and that will directly reduce the amount of corporation tax a business pays.

R&D reliefs for small businesses are not as generous as they once were, with the government reducing the amount of relief that can be claimed, believing the system had been open to abuse and fraud.

In short, any business that undertakes research or development to achieve an advance in science or technology may qualify. Many businesses, whether in construction or IT, developing new products or processes may qualify for the relief often without realising. The relief can be applied to staff, materials, and even utility costs.

Small businesses – which HRMC considers having less than 500 employees and a turnover of £100m – can claim up to 130 per cent of qualifying costs from yearly profits plus the normal 100 per cent deduction, totalling 230 per cent.

#5 – Patent box

Limited companies that derive an income from patents or have undertaken qualifying development on patents can pay corporation tax at just 10 per cent on those profits.

To qualify, those patents must be registered with the UK Intellectual Property Office, the European Patent Office or relevant IP authorities in EU countries.

The patent box system is complex, however. It will be necessary to identify those patents that qualify and the profits that are generated, and that is not always straightforward.

#6 – Buy plant and machinery

Businesses that purchase qualifying plant and machinery can claim tax relief of up to 100 per cent of those costs, reducing their corporation tax exposure. Every business has an annual investment allowance of £1m, making it a significant relief. It is possible to offset 100 per cent of any qualifying expenditure in the first year of purchase – a measure introduced in 2023’s Spring Budget.

The allowance notably excludes cars but does extend to a wide range of other assets including vans, IT, plant and machinery. It can also be applied to second-hand assets.

#7 – Switch to electric company cars

Businesses that purchase new and unused zero-emission electric cars can qualify for a 100 per cent first-year allowance, meaning that the full cost of that purchase can be used to reduce profits and corporation tax. There is no upper limit on the cost of those purchases, making electric vehicles an attractive company car option.

James Johnson is a partner at the accountants Hillier Hopkins. He works with ambitious and growing businesses, advising on funding, tax and compliance.

More on corporation tax

Tax advantages of a limited company versus sole trader

The post 7 ways to reduce your corporation tax bill appeared first on Small Business UK.

Government agency the Valuation Office Agency (VOA) has given every commercial premises in the country a new rateable value, as of 2023, but what does that mean for your business?

It is important when looking at your new rates bill to check the rateable value figure, which is not the figure you pay but is the starting point for how your bill is arrived at.

What is rateable value?

That rateable value (RV) figure is supposed to represent what you as a tenant – whether you actually rent the property or not (you may own it) – would pay to rent the premises you occupy if you had agreed a new lease/rental arrangement two years before, on 1 April 2021.

How rateable value is calculated

So, let’s imagine the RV is £35,000 on your rate demand. The VOA is saying that if you arrived at your actual premises on 1 April 2021 and wanted to you set up your business, you would pay a rent of £35,000 per annum to your landlord. If you actually did that, and you agreed a rent on or close to that date, then your RV at £35,000 is correct and there is little point in appealing that figure.

You will have noticed however, that 1 April 2021, the valuation date used by the Government, actually sits in the middle of the Covid pandemic and, more importantly, we were still in a lockdown.

>See also: Businesses set to pay extra £3bn business rates from April

Should you appeal your rateable value?

So, let’s go back to the original question you should be asking – as at 1 April 2021, would I have turned up “fresh to the scene” (don’t assume your business is there already and you have to rent those actual premises), and what would I have paid to rent those premises on that date? (You need to consider that if you were in retail/hospitality, you could not actually be able to use your premises on that date and, if in an office, your staff were probably working remotely.)

The question is, would you have actually agreed a new rent on 1 April 2021 at £35,000 per annum or would you have negotiated with your landlord rent concessions or actually not rented it at all? If the latter two are the case, then there is probably an argument to say your RV is too high and you should consider appealing.

Check the facts/floor areas are accurate

Most people are aware of the actual floor area they occupy – you may already have had a report before taking the premises or it should be easy, either with a tape or an electronic app, to measure the space you occupy.

You can check this against the VOA valuation by visiting this Government website.

Don’t assume the VOA valuation is correct

The VOA may not have inspected your site for many years, so do not assume its information is correct. If your property is a pub or a property where the RV is arrived at by looking at potential trading information, that will not be available until you start to engage with the VOA through the appeal process.

How do I appeal my rateable value?

Some small business owners ask me if they can appeal the rateable value themselves?

The answer is yes, you can appeal. but do go through the thought process and actions above – look at the RV, check your floor areas and if you think the VOA has made some obvious error, then start the process.

The link you need to follow is here and if you have the time and patience you can navigate through it.

>See also: How to challenge your business rates

Beware of cowboys, crooks and unqualified advisors

Other small business owners tell me that they’ve been phoned by people offering to help.

Please be aware of unqualified rating surveyors who may approach you offering to help. There has been an increase in the number of scams with the publication of this new list.  Anyone who rings you up and tells you they can save you money without knowing your property or having inspected it, is probably one of the above. Just put the phone down, rip up the letter or delete the email.

And if they want money up front, the same applies.

The rating industry is currently unregulated, so it is important to be aware.

Ask them which members of their organisation are members of the RICS/IRRV/RSA – and ask for specific names. Or ask them about the Rating Consultancy Code of Practice.

Seek professional help

You wouldn’t get pension or any other financial advice from someone who rang you up and was unqualified, so why do this with business rates? We suggest you use the information available publicly to deal with queries but if you need help get qualified, professional advice – it will be worth it.

Check your rates bill

Sounds pretty obvious but check for the following:

• Has it increased from last year’s bill?
• Has the RV increased?
• Have caps been applied to my increase?
• Am I getting Small Business Relief?
• Am I getting Hospitality Relief?

There are over 10 types of business rates relief that could apply to your rates bill – are you eligible for any of them? You can check here.

What’s changing with the non-domestic rating bill?

The bill had its second reading on 24 April and, while there is a lot to support within it, there are some big potential changes which will not be helpful for business.

You can follow this link to the relatively short debate. Conservative MP for Waveney gives an excellent explanation of the pitfalls.

It’s up to you to keep VOA up to date

One issue that should concern business is the change to put the onus on ratepayers to provide up to date information to the VOA on a regular basis – this could be small building works/change in turnover/change in rent etc. All of these must be provided to the VOA within 60 days or severe fines will arise, with the ultimate sanction being imprisonment.

There will also be an annual requirement to confirm that the information the VOA holds about your property is up to date. While the Government has said this is necessary to deliver more regular revaluations, which we welcome, it does potentially put a large bureaucratic burden on ratepayers when the opposite should be happening.

This requirement will be rolled out for everyone in 2026 but trials will begin before once it becomes law.

John Webber is head of business rates at Colliers

Further reading

What are business rates? A guide for small businesses – What are business rates, how much are they and do tenants have to pay them? Sophie Attwood of Colliers answers your questions

The post What is rateable value in 2023? appeared first on Small Business UK.

Whether or not you need to pay Value Added Tax (VAT) as a sole trader depends entirely on how much money your business is turning over. Basically, if at the end of any month your annual turnover exceeded £85,000 in the previous 12 months, you need to register for VAT.

You can also voluntarily register for VAT even if your turnover is under the threshold. Some sole traders choose to do this so that they can claim back the VAT on goods and services purchased for their business or to avoid financial penalties from accidentally going over the threshold.

Below, we explain how to register for VAT as a sole trader, how much you need to pay, VAT rates, charging VAT to customers, and MTD for VAT.

Registering for VAT as a sole trader 

You can register for VAT online with HMRC. Once approved, you should receive a unique VAT number relevant only to your business within 30 days. 

It will be provided on a VAT registration certificate, which will also have details of the dates you need to submit your first VAT Return by, and your effective date of registration (the date when you started to pay VAT).

Your VAT registration will be under whatever name you choose to trade as, whether that’s your own name or the name of your business. 

VAT rates as a sole trader

There are three different levels of VAT:

• Standard rate – currently 20 per cent, this applies to the majority of goods and services
• Reduced rate – currently 5 per cent, this applies to a very select set of goods and services, such as children’s car seats and home energy
• Zero rate – 0 per cent, which applies to most food and children’s clothes

You can find the full list of VAT ratings and exemptions here: VAT rates on different goods and services. 

(NB – There are also VAT exempt items, for which you cannot claim back input VAT on expenses used to produce the zero rated good. You can find a comprehensive explanation of this here: Help With HMRC)

Charging VAT on goods and services sold to customers

You will be required to charge the VAT element on your sales invoices. For example, if your invoice value is £1,000, you’ll add £200 (20 per cent) to the total price of the product or service and the customer will pay you £1,200.

Every quarter you’ll complete a VAT return showing how much you have collected in VAT from customers (Output VAT) and how much VAT you have paid to your suppliers (Input VAT).

If the Output VAT exceeds the Input VAT, you’ll pay the difference to HMRC. However, if the Input VAT exceeds the Output VAT, you’re able to claim back the difference amount from HMRC.

MTD for VAT

All VAT-registered businesses, regardless of turnover, should now be signed up for Making Tax Digital for VAT. Every business will be signed up automatically unless they apply for a VAT exemption. Making Tax Digital is part of the government’s initiative to make the UK tax system fully digital. 

In order to comply, you’ll have to use HMRC-approved software to maintain digital VAT records and submit your quarterly VAT returns.  

Three VAT Public Notices which offer relevant advice are:

• Notice 700 – VAT General Guide
• Notice 700/1 – Should I be registered for VAT?
• Notice 700/22 – Making Tax Digital for VAT
• These can be located here

The VAT advice line will help with queries on 0300 200 3700.

The relevant form is an Application for Registration – VAT 1 and you can download it all here.

If you have any doubts you should talk to your accountant who will explain the requirements in greater detail, and can help with specific queries or even complete the VAT return on your behalf.

How to easily track your profits?

Accounting software can help you comply with Making Tax Digital for VAT – and generally make it easier to manage your business cashflow and profits.

There’s a range of providers to choose from. We’ve rounded up three of the best below.

Further reading

The best accounting software for small businesses – It’s never been easier or more affordable to manage your tax and accounting using small business accounting software – find the best accounting package for your needs
How to manage your accounts as a small business – Everything you need to know about preparing your financials in the early stages of business
Tax advantages of a limited company versus sole trader – Haydn Rogan explains the tax advantages and disadvantages of status as a limited company and as a sole trader
9 accounting software platforms for Making Tax Digital – Here, Mariah Tompkins scrutinises accounting software options that small businesses can use for their digital tax returns 

The post Sole traders and VAT appeared first on Small Business UK.

UPDATED: Navigating your way through the early stages of your company life cycle can be one of the most challenging times for small businesses.

From knowing when it’s time to recruit to choosing suitable office space, there are a number of pitfalls awaiting companies who aren’t prepared for what’s ahead – and financial instability can be one of the deadliest snares when it comes to staying afloat.

In this post, the private investment experts at Current Capital break down a selection of tactics business owners can use to extract profit from their business, while keeping one eye on your taxes at all times.

Pension schemes

When it comes to saving for retirement, you could see some immediate benefit from pension contributions – as this is one way to extract profit from your company while still benefiting from tax relief. Whether it’s an individual or the company itself who pays into the pension fund, this money isn’t treated as a benefit, meaning that it’s very tax efficient.

£40,000 is the limit for individuals on what can be paid into a pension each tax year, but this is reduced for any person with an annual income which exceeds £150,000. Personal pension contributions are restricted to no more than 100 per cent of an individual’s relevant earnings, meaning they need to be carefully considered when using some of the other strategies in this article.

Any pension contributions made by the company (rather than the individual) reduce the business’s overall profit, meaning the amount of corporation tax is also reduced. Unlike personal contributions, there is no limit on how much a company can pay into a pension scheme.

When withdrawing from your pension pot, the first 25 per cent is tax-free. After this, any withdrawals will be taxed at your tax rate at the time, which is generally lower than at the time of paying into the scheme.

Both a short-term way of extracting profit and a long-term way of planning for retirement, paying into a pension is a great way to make the most of your business’s income.

Dividend payments

Dividends can be paid to anyone who owns shares in a company, as long as the company is making sufficient profit to cover these costs. Starting in the new tax year this April, a shareholder can receive up to £2,000 in any tax year (6th April to 5th April) before paying tax – after this, any further payments will be taxed based on the tax bands below.

Remember, dividends are added on top of other income. So, if a dividend takes someone into the next tax band, it may be the case that the dividend is taxed (partially, perhaps) at a higher dividend tax rate.

The tax advantages of being paid dividends are twofold: firstly, they’re exempt from National Insurance Contributions and secondly, they’re discretionary. This means they can be tailored to individual needs, subject to the company being able to afford to pay them. When issued, all dividend payments should be accurately recorded, with a tax notification issued.

Find out more about dividends at gov.uk.

Salary and bonuses

In order to achieve maximum tax efficiency, it’s wise for directors to take a minimum salary. For directors, the first £11,850 is income tax-free. From there, you’ll pay 20 per cent on any salary up to £46,350, 40 per cent on any salary up to £150,000, and an eye-watering 45 per cent on any salary that exceeds this.

By keeping your salary just above the threshold of qualifying for a state pension, while keeping within a minimum tax bracket, you can get the most benefit from your wage.

One of the most obvious and appealing ways to extract profit from your company is to pay yourself a bonus. In terms of benefits, this will largely depend on whether you’re receiving a cash or non-cash bonus.

If your bonus is paid in cash or anything that can be exchanged for cash (like vouchers), this will be counted as earnings and will be subject to both PAYE and employee and employer NICs. For non-cash bonuses, the amount of tax will be dependent on the item in question.

Find out more about non-cash bonuses at gov.uk.

Private investments

Private investments are a chance to commit your money to another business, helping early-stage companies to reach their next stage of growth. With opportunities to invest your money in a private company that interests you both personally and professionally, you can invest your profits into the right business for you.

Investing in a private company means you can be involved from the early stages of a company’s life and make a tangible difference to its development. With the potential for EIS or SEIS eligibility, you may also be able to reap the rewards of great tax.

With your tax-efficient investments in good hands, you may even be able to decide on the amount of involvement you’d like with your investment and how often you’d like to receive updates. This means that you’re completely in the loop when it comes to where your investment’s being spent.

For companies looking to explore their profit extraction options and reduce their tax bill, these avenues will help get you started.

Director’s loans

This one is more temporary than the other options, but can be a method of extracting money nonetheless.

Director’s loans are better known for helping directors pay off unexpected bills or costs. They are admin-heavy, can cause concern from shareholders and run the risk of hefty tax penalties if paid late (after nine months and one day).

However, they can work the other way round, too: you can loan the company in return for interest. Any interest paid is treated as income and must be stated on your self-assessment tax return.

It is always best to speak to an accountant before heading down this path, though. More information on director’s loans can also be found on the gov.uk site.

The post Tax-efficient ways to extract profits from your business appeared first on Small Business UK.