What better time to set up your business accounts the right way than at the beginning of the tax year? A fresh slate, a fresh start and a blank page, means you can do your small business bookkeeping correctly from the beginning.
As a small business owner, you must ensure that your accounting is in order and ready to access at all times. Properly setting up small business accounts or side hustle bookkeeping is essential for accurate record-keeping, efficient tax preparation, and avoiding unnecessary penalties. By following these simple steps, you will make sure that your small business is on the right side of the UK taxman and in HMRC’s good books.
Step 1: Register with HMRC (if you haven’t already!)
The first step in setting up small business accounts is to register with HM Revenue & Customs (HMRC). This process involves obtaining a unique taxpayer reference (UTR) number and registering for self-assessment. Self-assessment is required if your business is a sole trader, partnership, or limited company. Failure to register for self-assessment can result in hefty penalties from HMRC. Once registered, you are required to file a tax return each year and pay any outstanding tax by the deadline (31 January). You can register with HMRC up until October of the year you start trading, but there’s no reason not to do it sooner. Registering also doesn’t stop you from using the trading allowance, you just tick the box when it comes around to the tax return if your gross profit (amount from all income/sales) is under £1000 for the year.
Step 2: Choose an Accounting Method
The next step in setting up small business accounts is to choose an accounting method. There are two main methods of accounting: cash basis and accrual basis. The cash basis method records income when received and expenses when paid, while the accrual basis records income when earned and expenses when incurred. The cash basis method is simpler and more suitable for smaller businesses with low turnover, while the accrual basis is more complex but provides a more accurate picture of your financial position. Consider your business needs and, if necessary, consult with an accountant to determine which method is best for you. I recommend cash basis accounting for the small businesses and side hustles that I work with, and if you’d like to discuss your options, you can book a free 30-minute call with me.
Step 3: Open a Business Bank Account
A separate business bank account is essential to keep your personal and business finances separate. Maintaining separate accounts makes accounting, record-keeping, and tax returns much more straightforward. Opening a business bank account is relatively easy, and there are many high-street banks that offer business banking services. You will need to provide proof of identification (such as a passport or driving licence) and proof of address (such as a utility bill). For smaller businesses and side hustles, there are lots of free internet-based options like Mettle or Starling, the important thing is to shop around and compare the fees, features, and additional bonuses (for example NatWest, Royal Bank of Scotland, Ulster Bank NI and Mettle business accounts will also give you access to accounting software at no additional cost) of different business bank accounts to find one that suits your needs. It is important that you choose a business bank account not just a savings account to avoid any fines and penalties.
Step 4: Decide on a Record-Keeping System
Once you have established your accounting method, you need to decide on a record-keeping system for your side hustle bookkeeping. Record-keeping is essential for managing your finances and preparing tax returns. You should maintain accurate records of all income and expenses, including invoices, receipts, bank statements, and other financial statements. You can use either manual or computerised record-keeping systems. There are many accounting software packages available, such as Xero, QuickBooks, and FreeAgent, which can help small business owners with their record-keeping. These cloud-based systems mean that your data is always backed up and much more secure than with paper-based systems, they also help you to generate your accounts. And they will be ready to handle the switch when Making Tax Digital for Income Tax comes into effect. If you are not yet ready to use software, then spreadsheets backed up to your own cloud-based storage are another excellent option.
Step 5: Keep Track of your Income and Expenses
Keeping track of your income and expenses is the main part of business bookkeeping. Having an accurate record of your expenses is crucial for reducing your tax bill. Business expenses can be offset against your business income, reducing the amount of tax you need to pay. However, you can only claim genuine business expenses that are necessary for your trade. You should keep accurate records of all your business expenses, including receipts and invoices, and ensure that they are strictly for business purposes. Personal expenses, such as clothes or entertainment, cannot be claimed as business expenses. You also need to keep track of your income. By splitting this so that you are not only tracking the amount of income but also your products and where the income is coming from, you can quickly see where and how your business is making money, and build this into your business plan and growth structure. You need to keep an eye on your income even if you are planning to use the trading allowance as you can easily go over the £1000 allowance in one year, you can read my blog about the trading allowance here.
Step 6: Set Up Cloud-Based Folders
An area that is often forgotten, is organising your receipts and invoices. You can take photos of these so that you don’t need to keep box files or the originals in paper form. These can then be uploaded to your accounting software, linked to income and expenditure instances or saved into folders on a cloud-based system such as Google Drive, One Drive or Dropbox. Having yearly and monthly folders set up, and ready to add your invoices and receipt files, can save you lots of time in the future.
Further down the line, you will need to prepare for your Annual Tax Return, although that is not a focus of this blog, it is one of the reasons why you need to set up your small business accounts correctly, as it will make filing much easier.
Setting up your small business accounts for the new UK tax year can seem daunting at first, but it’s essential for maintaining accurate financial records, complying with HMRC regulations, and avoiding unnecessary penalties. By following the steps outlined above, you will be ready to start recording and filing for the year for your small business accounts or side hustle bookkeeping. By keeping on top of them and checking your accounting software at the end of each day, and your account documents at the end of each week, you will be well prepared for any tax questions or payments that arise, therefore ensuring that you are well-prepared for the upcoming tax year, leaving you to focus on growing your business!
If you have any questions, concerns, queries or just need a little hand-holding with your set-up, then book a free call to chat it through.