New limited company – an accounting checklist

New limited company - an accounting checklist

So you’ve just set up a new limited business. Perhaps you’ve taken the big leap from employee to business owner. Well, we imagine your head is spinning with all the things you need to sort out to ensure the success of your new business.

We’re here to offer you some helpful guidance on the accounting side of setting up a new limited company. Our checklist brings you all the important things to consider when it comes to accounting.

1. Accounting setup

Consider the accounting software you’ll use to run your company. For example, what platform will you choose to help you send invoices? How will you track bills of who you owe money to?

It’s important to get these things set up in advance so you’re not rushing when you need to send your first invoice.

The small businesses we work with tend to use accounting software in a bid to make their future lives easier. Software to consider include:

  • Xero
  • QuickBooks
  • Sage
  • FreeAgent – particularly relevant for those with NatWest or Mettle bank accounts, who can get FreeAgent at no cost when they link their bank accounts.

2. Set up a dedicated business bank account

You will need to register a separate bank account. This account should be used for all business income and expenses. Now in the UK most traditional banks typically charge for business accounts, however, it’s worth doing your homework as many offer 18 or 24 months free for new startups.

In addition, some of the new digital banks such as Starling or Monzo offer free business banking so it may be worth looking at these too.

*We can’t stress this enough, do not use your own personal account for business trading!

It really muddies the water so the sooner you can get a standalone account set up just for your business the better!

3. Consider how you’ll be paid

For limited company directors, as the company is a separate legal entity, you either need to take money from the company to pay yourself a salary via PAYE or to declare a dividend.

Strictly speaking, you can borrow money from the company as a loan but that can have tax implications if it’s not repaid so you need to be very careful.

Below we explore the most tax-efficient ways to pay yourself as a startup operating as a limited company.

Pay yourself a salary, dividends or both?

Most startups are owner-managed, meaning the day-to-day running is being done by the owner of the business. Where this is the case, as the owner and Director of the company you have a choice as to how you take money from your company. There are two primary choices:

  • Take a regular, monthly salary from the business, the same way a regular employee would take a salary.
  • Take a dividend from the business.

Now the first thing to note is that dividend’s are only possible if a company is profitable and has built up reserves which it can pay out to the owner. If that’s not the case, then you’re best off speaking to your accountant to understand your options.

Assuming the business is profitable then both a salary and a dividend will be available to you as options – so which should you go for?

Well, it’s usually best to take a combination of both, typically a low monthly salary with the rest being paid out in dividends.

Why take a salary as a limited company Director?

When a Director pays themselves a low salary it usually results in an overall tax saving for both the company and the Director. This is because a salary paid to a Director is deductible for corporation tax purposes, and so assuming you set the salary at the right level it will actually reduce your tax bill.

There is also another crucial reason to pay yourself a salary, which is that assuming the salary is above £6,396 in 2023/24 then it will be a qualifying year for state pension purposes. This helps to ensure you qualify for a full state pension entitlement in the future. If you don’t pay a salary and just take dividends then there is a risk that you will not be accruing a qualifying year for state pension.

4. Register for taxes

Limited companies must pay corporation tax. Here, we outline the basic corporation tax considerations of running a limited company.

Do I have to register for corporation tax?

These days, when a company is registered with Companies House it will automatically be registered for corporation tax. HMRC will usually issue a letter to the registered office within a couple of weeks of when the company is incorporated. This letter contains a Unique Tax Reference (UTR) and you must keep this. Then, once the company has begun trading, you must notify HMRC within three months of when it started trading.

What is corporation tax?

Corporation tax is a tax that limited companies in the UK pay on their profits. It is a tax calculated on the annual profits of the business.

What is the current corporation tax rate?

The current rate for tax year 2023/24 is 19% for businesses with profit below £50,000 increasing to 25% for businesses with profit above £250,000. If profit is between these levels a marginal rate of corporation tax applies.

When is my tax return due?

The first tax return will be due 12 months after the end of the first accounting period. If the return is not filed by this date HMRC will issue a late filing penalty of £100. If you still fail to submit the return further penalties will be charged.

How is my corporation tax calculated?

A company must prepare statutory annual accounts and file these with Companies House. These accounts form the basis of the company’s corporation tax return, or CT600. A company should use these annual accounts to prepare its corporation tax return, making tax adjustments as necessary which your accountant can advise on.

How do I file my corporation tax return?

Most companies ask their accountant or tax advisor to prepare the tax return at the same time as preparing the annual accounts. One of the reasons for this is that corporation tax returns must be filed online and require special software to do so. Your corporation tax return will include all the details HMRC require to review and process your return, including company details such as name, tax reference and registration number along with turnover, profit and details of allowances and reliefs claimed.

When does my corporation tax bill have to be paid?

Corporation tax payments are usually due 9 months and 1 day after a company’s yearend. This means the payment deadline is before the deadline to file the corporation tax return and so this is something you must watch out for. Where you pay your corporation tax bill late HMRC will charge interest on the amount you owe.

Most businesses, including startups, will benefit from having their accountant prepare their corporation tax return. An experienced accountant will help you to identify all tax reliefs you may be eligible for, they will also ensure your tax return is accurately prepared and filed on time. A good accountant should also remind you when the corporation tax is due for payment.

Do I have to register for Self Assessment?

Completing a Self Assessment tax return could be relevant for Directors/Shareholders of limited companies because most Directors receive a low monthly salary and take the rest as dividends. In this case, the dividends are not taxed as pay-as-you-earn (PAYE) meaning they must be reported on a Self Assessment tax return.

Depending on how you’re paying yourself, your accountant will be able to advise whether you’re required to submit a Self Assessment tax return.

Should you VAT register?

For the majority of businesses that breach the £85,000 turnover threshold, VAT registration is compulsory. For others, whose turnover is below £85,000, registering for VAT is voluntary and these businesses would be wise to consider their options before rushing in.

We’d recommend speaking to an accountant and seeking advice on your VAT requirements.

Whether voluntarily registering for VAT is beneficial depends on your specific circumstances, but as a general rule if you are invoicing businesses who are themselves VAT registered, then it may be worth voluntarily registering. If you are invoicing customers who are not VAT registered then more care is taken and it may not be in your best interest.

5. Stay on top of your books!

Bookkeeping is the process of recording a business’s financial transactions. These transactions will usually include things like your sales, purchases, cash payments and receipts, wages and VAT entries.

Historically, the bookkeeping process involved the use of books and ledgers (hence the name) to record these transactions, but thankfully that’s a thing of the past. Today, most bookkeeping services are completed on spreadsheets and software. It is important to distinguish between the art of good bookkeeping and just using bookkeeping software – they are two different things!

We have seen excellent bookkeeping from clients who use Excel and who have very tidy records. We have also seen appalling bookkeeping from businesses using cloud software. The golden ticket is combining cloud software and excellent bookkeeping.

The point is that cloud based accounting software will not simply do the bookkeeping for you – you need a process, you need to do it regularly and you need an understanding of the key concepts.

At Raw, we believe bookkeeping is central to the success of your small business finances. Getting things right from the start will give you the strongest financial platform to run your business.

Why is bookkeeping important?

Bookkeeping is important because done right, it gives you an accurate, timely picture of your business. It shows your financial position in real-time.

So, what’s the benefit of that?

It means you know who owes you money, and whether any invoices are overdue. If they are, you know who to chase, which helps you bring in the money you’re owed sooner and improve your cash flow. For most startups, cash flow is a key concern in the early days and bringing cash in even if just a few days earlier can have a huge impact. Bookkeeping also shows you who you owe money to. That way, you can make sure you are paying your suppliers within their payment terms. In some cases, this may mean keeping the cash in your business for longer and only paying the supplier when the payment is due.

6. Cash flow – don’t take your eyes off it for a second

Having the books tidy and up to date helps massively when it comes to cash flow projection. Accurate books that reflect the reality of the situation mean you can work out what cash looks like in the business.

Why is knowing cash flow important?

At a fundamental level it tells you your company’s financial position, so whether the business will survive. It sheds light on your ability to pay yourself, employees (if relevant) and HMRC.

On a secondary level knowing your cash flow means understanding whether you have any surplus cash in the business that you can invest in growing your company. For example, the amount that can be attributed to marketing spend or recruitment for example.

7. Get a good accountant – they’ll be worth their weight in gold when you start

You may feel like tackling your own accounting is where you can save a bit of hard-earned money but experienced and knowledgeable accounting professionals will be worth their weight in gold. The expert financial insights they bring could save you both time and money. Whether it be expertly handling your bookkeeping, payroll and pension requirements or saving you money on your tax bill.

In our opinion, your relationship with your accountant should be viewed as a partnership – an extension of your team you can rely on to help guide you through the complexities of running your own business.

If you’re the proud new owner of a limited company or are thinking about setting up your own limited company get in touch today. We’re experienced at offering expert accounting advice and guidance to new business owners and would love to support you.

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