Are you thinking of starting a new business?
Perhaps you’ve always wanted to work for yourself, and lockdown gave you time to think your plans through properly? Or maybe the current climate of economic uncertainty has made you want to have more control over your destiny? You’re not alone. One effect of the global pandemic is that even more people than usual will be motivated to set themselves up in business.
Helping new businesses get up and running is one of our areas of expertise. So, if you’re planning a start-up, we know the kind of questions you want answering.
Last month, in the first instalment of this two-part blog, we addressed questions around when to start trading, business structure options, VAT registration and financial record-keeping. This month we look at some more frequently asked questions about the set-up process.
1. How & when do I get paid?
If like many new business owners, you’re coming out of regular employment, you’ll be used to your employer paying your salary directly into your bank account each month. But when you’re running your own business, you’ll be responsible for paying yourself, and the way you do this will depend on whether you are self-employed or operate as a limited company.
Self-employed
If you’re self-employed, things are very straightforward. You are the business so you can draw any money you need to live on from your business account. While it’s not a legal requirement to have a separate bank account for your business, it’s good practice, and we’d recommend you do.
A dedicated business account will give you clear separation between your personal and business life and will help simplify your record-keeping.
Note: It’s essential to understand the difference between the money you take as drawings – and the profit the business makes. Some newly self-employed people get caught out, believing they will only be liable for tax on their drawings. Your tax bill will be calculated purely on the amount of profit your business makes (i.e. your sales less your allowable costs). How much you choose to take as personal drawings will have no bearing on your tax liability.
Limited companies
For business owners operating as limited companies, getting paid is a more structured process. You’ll probably want to set up and run a payroll system and use this to pay yourself a regular salary. Running a payroll system is beneficial because it ensures you are using your personal tax-free allowance in the most tax-efficient way and you’re making regular contributions to your state pension.
You can also opt to pay yourself through dividends – or through a combination of both salary and dividends. Which is the most tax-efficient way to pay yourself will depend on how your business is performing and your personal circumstances – including whether you have a partner or another family member who can share revenue with you.
Remember as well as paying Income Tax; if you’re running a limited company, you’ll have to pay Corporation Tax – currently set at 19% – on any profit the business makes.
2. How do I pay my National Insurance?
If you’re self-employed, you will calculate and pay your National Insurance as part of your annual tax return. If you operate as a limited company, you’ll need to process and pay National Insurance through your payroll mechanism.
3. What can I claim for?
You’ll want to run your business as tax-efficiently as possible, making full use of any tax breaks you’re entitled to, and offsetting any tax-deductible costs against your end of year liability. It’s a complex area that’s subject to frequent legislative changes.
What you can claim for will depend on your personal situation, the specific nature of your business and its legal status. Regarding this last point, getting your structure right at the outset is crucial. Even if you don’t plan to use an accountant, you’d be well advised to at least take advantage of the free introductory consultation most offer. A good practice will be happy to give you the benefit of their time and share basic advice without you having to make any commitment.
Depending on your situation, it might be beneficial from a tax perspective to set up as self-employed initially, switching to limited status later as revenue grows. The good news is that changing the legal status of your business at any point is relatively straightforward.
4. How & when do I pay my taxes?
You might be used to having your tax deducted automatically at source through PAYE, but as a business owner, working out and paying any tax you owe is your responsibility.
Self-employed
If you’re self-employed, you must complete and return your online Self-Assessment tax return to HMRC by midnight on 31st January following the end of the tax year. This is also the date by which you’ll have to settle your tax bill if you owe less than £1k. If you owe more than £1k, HMRC will require you to make two ‘payments on account’ – each equivalent to half your tax bill. The first instalment will be due by 31st January, the second by 31st July.
Limited companies
Limited companies must complete an annual tax return and file a set of accounts. You’ll need to work out your profit or loss to calculate how much Corporation Tax is due (this is different from the profit or loss shown in your annual accounts).
The deadline for filing your tax return is 12 months after the end of your financial year – but as you are required to settle any Corporation Tax due no later than 9 months and one day after the end of your financial year, it makes sense to do both at the same time.
Whether you’re self-employed or running a limited company, you can prepare and file your tax return yourself, or engage an accountant to do it for you.
5. What do I need to know about employing staff?
You can employ staff whether you operate as self-employed or as a limited company, but becoming an employer brings new responsibilities, and we recommend you seek professional advice before engaging staff.
You might be tempted to do things yourself, but employment law is complex and continually being updated. The consequences of getting something wrong can be serious, and potentially far more costly than talking with an HR expert or a specialist employment solicitor. You’ll have to comply with a range of legal obligations which include undertaking employment checks, ensuring you pay at least the National Minimum Wage and taking out employment liability insurance. You’ll find a full list of what to do in HMRC’s guide, Employing staff for the first time.
In terms of payroll management, taking on your first employee should not be too demanding. Besides wages, you’re likely only to have to make a small contribution towards their pension. Employment Allowance allows you to reduce your annual National Insurance liability by up to £4k, and there’s no employers NI to pay on employees who are aged under 21.
Taking on new staff can change the dynamics of your business, and you’ll need to think carefully about the kind of culture you’re looking to develop. As well as preparing a detailed job description setting out the skills and experience you want, you’ll need to think carefully about your expectations in terms of personality, values, behaviours and so on. Employers typically recruit staff based on their competence – and part with them based on their attitude, so you need to consider how you will identify these personality traits in your interview process.
6. Are there advantages if I work from home?
If the nature of your work allows it, working from home can be one way to keep your overheads down. Even if it’s just while you get your new business off the ground, operating from your spare room, garden shed, or kitchen table will save you having to waste revenue on renting or buying a workspace.
From a financial perspective, there can be advantages to working from home. You can, for example, claim tax relief on a proportion of your expenditure for outgoings like heating, electricity, water, home insurance and council tax. The amount you can claim will depend on how much time you spend working at home and how much space you use.
But if you do choose the homeworking option, it’s worth getting professional advice to ensure you don’t make any costly mistakes. For example, if your business pays for the building of a home office or the conversion of a part of your home, or you include mortgage payments when calculating your tax relief, there are likely to be Capital Gains Tax implications when you come to sell your house
You can find more information in our blog: Are You Running Your Business from Home? 5 Top Home Office FAQs Answered
2. How do I pay my National Insurance?
If you’re self-employed, you will calculate and pay your National Insurance as part of your annual tax return. If you operate as a limited company, you’ll need to process and pay National Insurance through your payroll mechanism.
Let Inca Set You Up to Succeed!
The information outlined here can only ever be a guide. No two businesses are the same, and the individual circumstances of each person planning a start-up can vary widely. A range of factors – including how much you’ve earned in previous financial years – will need to be looked at in detail to determine the best, most cost-effective solution for you.
For nearly 20 years, Inca has helped hundreds of businesses to get started. We work with owners to create a structure that’s tailored to their situation, gives them the very best chance to succeed, and crucially, is flexible enough to adapt to future growth and change.
We’d love to hear about your new business and help you get set for success.
If your business has been affected by COVID-19 and you’d like help or advice on any aspect of your business finances, give us a call. We’re here to support you in any way we can.
For an initial chat, call us now on 01235 868888 or email us at [email protected].
