Bookkeeping

During the December 2021 Facebook Live, I talked about VAT, how your business and tax return are affected by it. I did cover this topic in January 2021, but I wanted to go over it again just in case anyone had missed it. I talked about – what the threshold is, the basics of it and how it affects your tax returns. I didn’t cover It won’t cover how to use the different VAT codes, go into detail about the different VAT schemes or how to file your VAT return.

What is VAT?

VAT stands for value-added tax and it’s charged on pretty much everything you buy within the UK.  Most prices will be displayed including VAT, or it will state whether it is excluding VAT.  Different products/services can have different rates of VAT.  It only affects the consumer in terms of the price they pay for the products/services.  If you are a business, it can create additional work for you and the records you need to keep. You might have to register for VAT if you reach the threshold, track the VAT you charge and pay, submit your returns to HMRC on a regular basis, and then pay them the VAT that is owed.  The VAT that is charged on your sales does not belong to you – it is a tax that you are collecting on behalf of HMRC.

When do I need to register for VAT?

Most businesses won’t need to register for VAT unless they expect their income (total sales that are not VAT exempt) to reach the VAT threshold in the next 30-day period or they met the threshold during the last 12 months. The current threshold as of 31/12/2021 is £85,000, and it will remain at that amount until 31/03/2024.  It is calculated on a rolling 12-month period, so you need to be aware of what value your sales are at continuously so you can register if you need to.  Once you reach the threshold, you will have 30 days after the end of the month in which you reached that threshold, to register with HMRC.

What happens once I register?

There are several different schemes, but the main ones are the Accrual scheme where you would record the VAT for all your sales and purchases as of the invoice date, the Cash VAT scheme where you would record the VAT for all of your sales and purchases as of the date they were paid, and the Flat Rate Scheme which is where the amount of VAT a business pays is a fixed rate and is only based on your sales.

After you are registered, you will receive your VAT registration number from HMRC and you must display this on all your invoices and sales receipts that you issue to your customers, record the VAT on your sales and purchases, add VAT to your prices, file your VAT returns as instructed and pay any VAT due to HMRC, keep digital VAT records and a VAT account. You will need to ensure that you are charging the correct VAT rate on all products/services that you sell.

The amount of VAT you will pay to HMRC each time you submit your VAT return will depend on which scheme you are using and whether you charged more VAT on your sales than you reclaimed on your purchases.

It is advisable that when you register for VAT, you set up a business savings account so that you are holding back 10-15% of the amount you are paid for sales, and you will then be able to pay any VAT you owe to HMRC.  This is because the amount of VAT you are paid by your customers doesn’t belong to you, it is money that is owed to HMRC that you are collecting on their behalf.  Normally, you would charge your customers 20% VAT which is the standard rate, but you would also have purchases that you have paid VAT on, so by setting aside 10-15% of the amount you are paid for sales, you won’t then be scrambling at the end of each quarter to find the money to pay HMRC as you will have saved at least some of what you may owe to them.

How often you have to file your VAT return and when by will depend upon the scheme you are using and when you registered, usually it is once every quarter and you will have 1 month plus 7 days to file and pay your return.  For example, if you had to file a VAT return that covered April to June, you would have until August 7^th to file the return and pay any amount due to HMRC.

How do I record the VAT on sales and purchases?

The easiest way to record your VAT and to be able to submit your returns is to use MTD compliant software like QuickBooks Online to help you to track the amount of VAT you owe to HMRC and to submit the return.  All VAT returns must be submitted online using MTD compliant software.  This will also help you with recording your transactions digitally as you will be able to attach proof of what each transaction is for.  You can do this within QBO or use third-party software like AutoEntry to help with entering the information into QBO and storing your digital receipts.

How does VAT affect my self-assessment and corporation tax returns?

As VAT is money you are collecting on behalf of HMRC and it is owed to them, if you are VAT registered the VAT portion of your sales and purchases are not included within your tax returns and are not included in the calculations of how much tax you owe.  These figures are actually shown on the balance sheet as money owed to a creditor.

What else do I need to know?

The majority of products and services will have the standard VAT rate charged, but there are also items that are zero-rated or even exempt, which you will need to be aware of.  You will also need to be aware of how to record any items that are bought or sold to people who live outside of the UK, as the way they are treated is different – especially now that Brexit has happened.  HMRC have many pages about the different VAT rates and how to treat items, so you can read about the different rules on there. However, if you are VAT registered, it is a good idea to have an accountant who can help you to know how to deal with anything that does not follow the standard VAT rules, especially if you are dealing with importing/exporting products with the EU.

While I am a bookkeeper and understand the fundamentals of VAT and how it is to be dealt with, some areas like dealing with importing/exporting products with the EU are quite specialist areas, so I always work closely with a client’s accountant to make sure we are recording the information within the accounts correctly.

If you would like further information on VAT and whether you need to register, feel free to e-mail me.

During the November 2021 Facebook Live, I spoke about whether you are required to file a self-assessment tax return if you are employed and set up a small self-employed business.

Normally, if someone is employed and is paid through a PAYE scheme, they don’t have to file a self-assessment tax return, as the information will be submitted to HMRC by their employer every time they are paid, and the tax taken at the time.  However, if your income isn’t straight forward you may be required to submit a yearly self-assessment tax return.

Who needs to submit a self-assessment tax return?

At the end of every financial year, every self-employed person in the UK who has earned more than £1,000 in income (this is sales only), needs to file a self-assessment tax return with HMRC.  There are others who also need to file SATRs and they include all directors of limited companies, partners in a business partnership, if you have foreign income, money from renting out a property and a few other reasons.

If you are self-employed and you have less than £1,000 in trading income (the amount you have received in sales before any deductions are made), you do not need to file a self-assessment tax return.  There is a page on the HMRC site that has a helpful tool to check if you need to file a return.

However, it is important to note that if you received any of the Self-Employed Income Support Scheme Grants, during the pandemic, no matter what the level of your trading income is (total sales before any deductions), you must file a self-assessment tax return.

What happens if I am employed and set up a self-employed business?

If you are over the threshold of £1,000 in your self-employed business, you will have to file an SATR. You fill out the employed section – most of the figures should be pulled through due to the employer filing payroll through RTI every time you are paid, but it is important that you compare the information to your P60 and verify the information is correct.  You may also have additional information to fill in like the “working from home” allowance that has been provided due to the pandemic or maybe benefits in kind.

Under the self-employed section of the return, you would fill out all the information for your business from your accounts.

You may also have other sections of the return that need to be filled out.  For example, any interest received on savings, pension income or contributions, income from shares etc.

Once you have entered all the information into the return, all the income amounts will be added up together, and your personal allowance will be applied.  The personal allowance from 06/04/2021 to 05/04/2022 is £12,570.  If you have already used up your personal allowance, you will be taxed on all income over the personal allowance.  The amount you will have to pay will depend on which tax bracket your total income is in.

Here is an example of how your tax would be worked out if you were both employed and self-employed.  The names and figures are fictional and for illustration purposes only.

Sarah is employed by a company and in the 2021/2021 tax year she earned £35,000 as her salary.  Sarah is also self-employed and earned a profit of £20,000 for the 2021/2022 tax year.

Her total income for the year was £55,000.

After her personal allowance of £12,570 was deducted, her total taxable income was £42,430.

Sarah would have to pay 20% tax on all income up to £37,700 – a total of £7,540.  She would then pay 40% tax on the remaining income of £4,730 – a total of £1.892.

Sarah’s total income tax owed for the 2021/2022 tax year would be £9,432.

During Sarah’s employment, tax would already have been deducted from her salary and this will show on her P60.  She will need to ensure that this information is entered into her tax return, and she would then need to pay the remaining amount owed for income tax.

You will also need to ensure that you are keeping accurate records for your self-employed business.  You need to keep all sales and purchase receipts for 5 years from January 31^st after the tax year ends.  For example, for the 2021/2022 tax year, your tax return doesn’t need to be filed until 31/01/2023.  In that instance, you would then be required to keep your financial records for 5 years from 31/01/2023.   This doesn’t necessarily mean that you need to keep the paper receipts, as HMRC are now accepting digital records for certain items – so if you have any of your sales/purchase receipts in pdf or jpg format, you can simply keep those for your records.  It is a great idea to attach these receipts to the transactions on your accounting software if it will allow you to do so, as this will help you in terms of being compliant for Making Tax Digital.

It is important to note that all self-employed businesses, and those with rental income, with a trading income of £10,000 or more will be required to file information quarterly with HMRC from April 2024 in line with Making Tax Digital (MTD).  You will need to do this using MTD compliant accounts software.

When do I submit the return to HMRC?

Your self-assessment tax return must be submitted online by January 31^st following the end of the tax year.  For the tax year 2021/2022, your tax return must be filed with HMRC by midnight on January 31^st, 2023.  You will also need to make sure you make any payments to HMRC for any money owed to them for tax and NI.

If you are allowed to submit paper returns (only very specific businesses are allowed to do this), you would need to submit the return by midnight October 31^st, 2022.

If you are looking more for someone to provide you with tax advice and help with forecasting and submitting your year-end tax returns, you may want to look for an accountant.

Here is the page on the HMRC website about the deadlines for submitting your tax return and making payments.

If you have any questions about whether you need to submit a self-assessment tax return, or how to keep accurate records for your business, feel free to e-mail me and I will get back to you!

During the October 2021 Facebook Live, I spoke about the differences between an accountant and a bookkeeper.

While the jobs they do are quite similar, they are quite different, but having a bookkeeper and an accountant working together with you on your business, can make a huge difference.

The work that bookkeepers and accountants do often overlaps, and this is because bookkeeping is an essential part of the accounting process.

What does a bookkeeper do?

A bookkeeper helps businesses to process all the financial information that is generated (sales, purchases, bank transactions) and gets all of it entered into your accounts accurately.  They will be able to make sure that the transactions are recorded properly – for example, funds transferred from your main bank account to the savings account is recorded as a transfer and not as income – and show in the right place on the financial reports, so that you as a business owner, are able to see a clear picture of where your business stands financially.  Your bookkeeper will help to ensure that you are following all the legal requirements you must follow in terms of submitting regular information to HMRC and the records that you keep.  Depending on your bookkeeper, they can also help with running the monthly payroll, and even file your self-assessment tax return at the end of the year.

Your bookkeeper will work on your accounts on a regular basis, and the frequency will depend on your specific business needs – so it could be monthly or even weekly.  This will allow you to have “real-time” information about the business, instead of having to wait until the end of the year when you pass it all over to the accountant.  You will be able to make better-informed business decisions in a timelier fashion.

At the end of the tax year, the bookkeeper can help to ensure that all the year-end financials are completed and ready to pass onto the accountant who can then prepare any adjusting entries and file your end of year tax returns.  The accountant should then provide these adjusting entries to the bookkeeper so that the accounts software reflects exactly what the accountant has filed with HMRC and/or Companies House, and you have a more complete picture of the business.

With a lot of bookkeepers now using cloud-accounting software, as they use it daily within their job and assisting their clients, they can also provide you with training on how to use the software, and often have a better working knowledge of it.  A lot of the cloud-accounting software does allow you to provide access to the accounts to both the bookkeeper and accountant.

What does an accountant do?

Some accountants are involved in the day-to-day processing of the business transactions, but this is generally done by their own in-house bookkeeping team, or they outsource the work to other bookkeepers.  The accountant will be more into analysing the information presented within the accounts, to help you to grow the business.  This could involve providing you with tax advice, making financial forecasts, performing audits, filing the end of year returns with HMRC and/or Companies House, and providing you with any tax planning services you may require.

Should I have a bookkeeper and an accountant?

This is such a personal choice, and it really does depend on the size of your business and the complexity of it.  Different businesses will have different needs. 

If you are looking for someone to help take away the stress of trying to ensure that your accounts are kept up to date on a regular basis, are being kept accurately, and you are meeting all of the legal financial deadlines, starting with a bookkeeper to help free up your time so that you can focus on the business may be the best place to start.

If you are looking more for someone to provide you with tax advice and help with forecasting and submitting your year-end tax returns, you may want to look for an accountant.

However, you shouldn’t be afraid to have both of these valuable professionals on your team.  Having both a bookkeeper and an accountant can really help your business to run smoothly, help it to grow and help you to achieve your goals. It is important that whether you have a bookkeeper and an accountant, or one or the other, that you are working closely with them to ensure that they are provided with all the information they require to help keep your accounts up to date regularly.  It is a collaboration between you, the business owner, and the bookkeeper and/or accountant, with each person bringing their skills and knowledge to the table and working together.

I love working with my clients, and their accountants, as it allows me to focus on putting all of the bits of information together into a completed picture for the accountant to file the taxes, but also because it really does help my client to see exactly where their business stands and allows them to make those all-important business decisions and grow their business.

You will often find that when you hire a bookkeeper or accountant, they will be able to recommend or put you in touch with the other person.

If you have any questions about how a bookkeeper differs from an accountant or how a bookkeeper can help you with your business, feel free to e-mail me and I will get back to you!

During the September 2021 Facebook Live, I spoke about National Insurance Contributions – what they are, how much you have to pay and when.

The rates mentioned through this blog post are the rates that are for the tax year 06/04/2021 to 05/04/2022 unless otherwise stated.

What are National Insurance Contributions?

National Insurance Contributions (or NICs) are a tax that is paid by the worker, and by the employer, to the government which helps to pay for some state benefits when individuals need help.  For example, state pensions, statutory sick pay or maternity leave.  Everyone over the age of 16 pays mandatory National Insurance if they are either an employee earning more than £184 per week, or self-employed and have a profit equal to or greater than £6,515 per year.  If you are an employee and earn between £120 and £184 per week, you receive a National Insurance credit without having to pay the contribution.

People can voluntarily pay NICs to help avoid gaps in their contributions.  If you don’t have enough NI credits, you may not be able to get the full State Pension.  You can read more about voluntary contributions on the HMRC website.

In order to pay National Insurance Contributions and receive the NI credits, you must have a National Insurance number.  It is normally sent to you automatically within 3 months of your 16^th birthday if you live in the UK and a parent has filled out a Child Benefit form for you.  However, you can apply for an NI number if you don’t have one.

There are different types of classes of NICs, and the type you pay depends on your employment status and how much you earn.

Class	Description
Class 1 NICs	Paid by employees who are earning more than £184/week and are under the State Pension Age. These are automatically deducted from your wages by the employer and paid on your behalf to HMRC.
Class 1A or 1B NICs	Paid by employers on any employee expenses or benefits and paid directly to HMRC.
Class 2 NICs	Paid by self-employed business owners who earn £6,515 or more in profits for the year.
Class 3 NICs	Voluntary contributions that you can pay to fill or avoid gaps in your National Insurance Record.
Class 4 NICs	Paid by self-employed business owners who earn £9,568 or more in profits for the year.

Not all contributions count towards the same types of benefits.

Class 4 NICs do not usually count towards any of the state benefits.

Class 1, Class 2 and Class 3 contributions all count towards the basic state pension and the new state pension.

Class 1 and Class 2 contributions count towards contribution-based employment and support allowance, maternity allowance and bereavement support payments.

Class 1 contributions count towards the additional state pension and contribution-based jobseeker’s allowance

How much will I have to pay in NI Contributions?

From April 6th, 2022 to April 5^th, 2023 all Class 1, Class 4 and secondary Class 1, 1A and 1B NICs will increase by 1.25%.  Those who are over the State Pension age will not be affected.  This is an increase that was announced on September 8^th, 2021 by the Government and is being used to pay for the NHS and Social Care.  From April 6^th, 2023 it will be moved to a separate tax and will be shown as the “Health and Social Care Levy”.

Class 1 National Insurance Contributions:

• If you are earning between £184/ week and £967/week (£797/month to £4189/month) you would pay 12%
• If you are earning over £967/week (£4189/month) you would pay 2%

You might pay less in NICs if you are a married woman or widow with a valid “certificate of election” or you are deferring NI because you’ve got more than one job.

Employers pay NI Contributions depending on the employees’ category letters.  The category letter is not related to a person’s National Insurance Number – but are used to determine the NI liability of the company and the employee.

Letter	Description
A	This is the default category for employees if they do not fall under any other category and the standard rate of NI is paid.
M	This is for employees under the age of 21 and means the Employer NICs are reduced or there aren’t any.
C	This is for employees who are over the state pension age and they would not have any employee contributions.
H	This is for apprentices under the age of 25 who are following an approved apprentice framework and the Employer NICs would be nil or reduced.
J	This is for employees who are deferring their NI because they are paying it in another job.
Z	This is for employees under the age of 21 who are deferring it because they are paying it in another job.
B	This is for married women and widows entities to pay reduced NI. It is quite a complex category and is rarely used.
X	This is for employees who don’t pay any NI – for example, anyone under the age of 16.

Class 2 and Class 4 National Insurance Contributions:

These are both based on the profits of the business.  If your profits are £6,515 or more a year, you would simply pay Class 2 NICs.  If your profits are £9,568 or more a year, you would also pay Class 4 NICs.

Class 2 NICs are calculated at £3.05/week and are a set rate.

Class 4 NICs are a percentage based on your profits – if you earn between £9,568 and £50,270 you would pay 9% of your profits for NICs and for any profit over £50,270 it would be 2%.

How do I pay my National Insurance Contributions?

If you are employed, your NICs are deducted from your pay and paid to HMRC on your behalf by the employer.  The employer will also pay the Employer NI contributions.  These figures will be shown on your payslip so that you know how much the contributions were.

If you are self-employed, the NI Contributions you pay will be calculated at the time you submit your self-assessment tax return.  However, you can get an idea of whether you will need to pay Class 2 if you keep your accounts up to date on a regular monthly basis, as you will be able to see what your profit is for the year, so if you can see that your profit for the year is £6,516 or more, you know that you will need to pay £3.05 per week for 52 weeks which is £158.60.

If you are both employed and self-employed, the Class 1 NI contributions will be deducted from your wages and the Class 2 and 4 NI Contributions on your self-employed work.

There are different rules for directors, landlords and share fishermen – but you can find information about how National Insurance is calculated for those particular sectors by going to the HMRC website.

If you aren’t sure whether you have enough National Insurance Credits to receive the State Pension or want to ensure you don’t have any gaps in your National Insurance record, you can check it online. 

If you have any questions about National Insurance Contributions, feel free to e-mail me and I will get back to you!

During the August 2021 Facebook Live, I spoke about the pros and cons of running a limited company and what you need to do in terms of your accounts.

If you are running a business in the UK, there are a few options that you can choose for the business structure.

1) You can set up as self-employed where you are responsible for all debts etc relating to the business and you are personally responsible for the taxes etc.   The whole profit/loss of the business belongs to you.

2) You can set up as a partnership, where you and your business partner(s) are responsible for all debts and taxes relating to the business as per your partnership agreement.

3) If you are a not-for-profit business you could look at setting up as a Charity where a board of trustees are then legally responsible for all debts and taxes.

4) You could set up as a Limited Company where all directors and shareholders are responsible for the business in terms of debt, taxes and reporting.

You should seek proper advice from a tax advisor or accountant before choosing the legal structure for your business.

There are pros and cons to each of the types of businesses you could set up as, but I am just going to talk specifically about Limited Companies.

Pros of running a Limited Company 

• Any debt that the company has belongs to the company and not to you personally as a Limited Company is a separate legal entity
• The company’s finances are separate to your personal finances – your personal assets are protected if the business fails
• Your company name is protected and no other business can use your company name; You must register the name of your business with Companies House
• Limited Companies are often given more credibility by suppliers and customers as it provides them with a sense of confidence in the business – this seems to be due to the fact that Limited Companies are more rigorously monitored due to having more complex accounting and reporting requirements.  Their details and accounts are also available to the public.
• More tax effective if you are earning £25,000 or more as a limited company can pay a lower tax rate than a self-employed person – Corporation Tax for the 2021/2022 tax year is 19%; once a sole trader is earning between £12,571 and £37,700, they will pay 20% tax on their income
• You can reduce your Income Tax and National Insurance Contributions by taking a salary and dividends
• As a Limited Company can have multiple owners, additional capital can be raised by selling shares to new investors; some banks will also only lend money to limited companies.

Cons of running a Limited Company

• More paperwork is involved in running a limited company as you will have to file a Corporation Tax Return, accounts with Companies House, an annual confirmation statement with Companies House, and depending on whether you are set up for director’s to take their salaries through PAYE, you would also need to register as an employer and submit regular payroll information; directors would also need to submit an end of year tax return
• As mentioned above, every year you must submit your accounts to Companies House for the business and this information is available to the public.
• Even though your business name is protected with Companies House, names are subject to certain restrictions, also if the business name you want to use is already registered, you would need to come up with another name
• If you have been disqualified as a director before you cannot set up a limited company
• Due to the accounting and filing requirements being more complex, you may need to appoint an accountant
• There are strict procedures that must be followed when withdrawing money from the business – it isn’t as simple as just taking the money out of the business the way a sole trader can
• Limited companies must follow strict record keeping guidelines – all meetings must have the minutes recorded etc

What impact does having a Limited Company have on my accounts?

As a limited company is a completely separate legal entity, you would need to ensure that you have a separate bank account in the company’s name and that all business and personal transactions are kept separate.  You would also be required to keep your accounts for the limited company separate to any self-employed businesses you may have.

A limited company is required to keep all of their financial information for a minimum of 6 years from the end of the last company financial year they relate to.  You can store the majority of the information digitally instead of having to store the paper copies now, and it is actually advisable that you attach your receipts and invoices to the actual transactions in your account’s software.

As mentioned above, there are more documents that limited companies must file in terms of their accounts.

Every year, a Corporation Tax Return must be filed with HMRC 12 months after the end of the accounting period it covers.  For example, if your tax year runs from 01/04/2021 to 31/03/2022, you would then need to file your Corporation Tax Return by the end of March 2023.  However, the payments for your Corporation Tax are actually 9 months and 1 day after the end of the accounting year, so it is best to get the Corporation Tax Return filed as soon as you can after the tax year ends.

The directors of a Limited Company will also be required to file personal tax returns with HMRC, and these must be filed by the 31^st of January of the following year.  The return for the directors would include any salary they have taken, dividends, and any other types of income they’ve had (income from shares, pensions, rental income), as well as any expenses that they can claim tax relief on – for example, pension contributions they’ve made.

You would also need to submit your accounts to Companies House, and this must be done 9 months after the accounting period ends.  Depending on the size of the limited company, it may be possible for abbreviated accounts to be submitted to Companies House.s an example of how your tax would be worked out if you were both employed and self-employed.  The names and figures are fictional and for illustration purposes only.

Every year, limited companies are also required to submit an annual return to Companies House – this is usually around the anniversary date of the incorporation of your company.  The statement just confirms that all of the information held on the public records by Companies House are still valid.  There is a cost for filing this statement and it is currently £13.00 if you file it online.

The information I have covered within this months’ Facebook Live is really just an overview as to Limited Companies.  It is advisable that before you set up a Limited Company, you discuss all of the responsibilities and tax implications with a tax advisor or a qualified accountant.  

If you have any questions about how to keep accounts for a Limited Company, feel free to e-mail me and I will get back to you!

During the July 2021 Facebook Live, I spoke about how having multiple self-employed businesses affects your personal allowances and tax returns.

Everyone in the UK has a personal allowance which allows them to earn a certain level of income before they must pay tax.

Each year, HMRC outlines what the tax-free personal allowance is and for this tax year the standard personal allowance – from 06 April 2021 to 05 April 2022 – is £12,570 in England, Wales, and Northern Ireland.  That means that each person can earn an income of up to £12,570 before they will pay any tax on it.  The personal allowance is different for those living in Scotland as they pay Scottish Income Tax.  You can read more about the Scottish Income Tax here.

Sometimes your personal allowance can be bigger if you claim Marriage Allowance or Blind Person’s Allowance, or it can even be smaller if your income is over £100,000.  You can find out more by going to the HMRC website and looking at the Income Tax Rates page. 

Once you have earned more than your personal allowance, you will start to pay Income Tax.  There are three rates.  I have given the rates after the personal allowance has been accounted for:

• Basic Rate which is 20% and charged on income between £12,571 and £37,700 for England, Northern Ireland, and Wales
• Higher Rate which is 40% and charged on income between £37,701 to £150,000 for England, Northern Ireland, and Wales
• Additional Rate which is 45% on all income over £150,000 for England, Northern Ireland, and Wales

The rates for Scotland are different due to the different tax they pay, and you can find the information about those rates by going to the income tax rates and allowances page on the HMRC website.

Whether you are self-employed or employed, the personal allowance and tax bands apply to everyone who is earning an income in the UK.

What if I am employed and self-employed?

When you file your tax return with HMRC, you will need to fill out the Employed section as well as the self-employed section of the return.

For the employed section – the information may already be partially filled in due to payroll being submitted through RTI, but it is important that you compare the information to your P60 and verify the information is correct.  You may also have additional information to fill in like the “working from home” allowance that has been provided due to the pandemic or maybe benefits in kind.

Under the self-employed section of the return, you would fill out all of the information for your business from your accounts.

You may also have other sections of the return that need to be filled out.  For example, any interest received on savings, pension income or contributions, income from shares etc.

Once all the information is entered into the return, all of the income amounts will be added up together, and your personal allowance will be applied.  If you have already used up your personal allowance, you will be taxed on all income over the personal allowance.  The amount you will have to pay will depend on which tax bracket your total income is in.

Here is an example of how your tax would be worked out if you were both employed and self-employed.  The names and figures are fictional and for illustration purposes only.

Anne is employed by a company and in the 2021/2022 tax year, she earned £35,000 as her salary.  Anne is also self-employed and earned a profit of £20,000 for the 2021/2022 tax year.

Her total income for the year was £55,000.

After her personal allowance of £12,570 was deducted, her total taxable income was £42,430.

Anne would have to pay 20% tax on all income up to £37,700 – a total of £7,540.  She would then pay 40% tax on the remaining income of £4,730 – a total of £1.892.

Anne’s total income tax owed for the 2021/2022 tax year would be £9,432.

During Anne’s employment, the tax would already have been deducted from her salary and this will show on her P60.  She will need to ensure that this information is entered into her tax return and she would then need to pay the remaining amount owed for income tax.

What if I have more than one self-employed job?

If you have more than one self-employed job, you will need to ensure you keep proper records.  If the two businesses are entirely different, this will mean you need to keep two separate sets of accounts as you will need to show the two businesses on the tax return separately.  If the businesses are of a similar nature, you would only need to keep one set of accounts.

When you submit your tax return, under the self-employed section, you would fill out the information for each business if they are different from each other.

All the income from both self-employed businesses will be added together and the tax owed will be calculated based on the taxable income after the personal allowance has been deducted.

Here is an example. The names and figures are fictional and for illustration purposes only.

Jim is a self-employed taxi driver.  He also makes and sells wooden toys.  Jim is registered with HMRC as self-employed.

In the 2021/2022 ta year, Jim has earned a profit of £15,000 from being a taxi driver and £6,000 in profit from selling wooden toys.  His total profit for the 2021/2022 tax year is £21,000.

After his personal allowance of £12,570 is deducted, his total taxable income is £8,430.

Jim would pay 20% tax on the £8,430 meaning his total tax for the year would be £1,686.

In both examples used, there would still be National Insurance contributions for the self-employed income that would need paying, so that is something to bear in mind.

There are other factors that can affect the amount of tax you pay and you can find out more about these on the HMRC website.  These include things like pension income, benefits in kind if you are an employee, interest on savings, income from shares, rental income or income from a trust.

If you have any questions about personal allowances or how to deal with your accounts if you have more than one self-employed business, feel free to e-mail me and I will get back to you!

During the June 2021 Facebook live, I answered some of the common questions about bookkeeping and accounts that I get asked quite a lot so I wanted to add the information into a blog post for you.

Do I need a separate business bank account?

There is no actual rule that says you need a separate business bank account; however, it is good practice that you do have a separate account as that way you can ensure you know exactly what funds the business has and it makes it easier to prepare your accounts.

How long should I keep my records for?

If you are a sole trader or a partnership, you are required to keep your financial records for 5 years.

If you are a limited company, you are required to keep your financial records for 6 years.

The date you need to keep your receipts from is not the date your financial year ends, but it is actually January 31^st after the tax year ends.  This takes into consideration that the end of year tax return must be filed by January 31^st of the next year.  For example, for the 2020/2021 tax year, your tax return doesn’t need to be filed until 31/01/2022.  In that instance, you would then be required to keep your financial records for 5 or 6 years from 31/01/2022.

If HMRC do an inspection on your business, they can ask for financial records dating back to the previous 2 decades, so you may want to store the information for a longer period of time.

How should I be producing invoices for my business?

You don’t always need to issue an invoice to a customer, it could be that you issue a sales receipt instead.

The easiest way to produce your invoices is through accounts software – like QuickBooks Online – if you are using software.  If you are using a CRM system or time tracking software you could potentially create your invoices on that software.

If you aren’t using any accounts software, you could just create an invoice using Word and send that to your customers.

If you are an e-commerce shop, depending on the website software you are using for your shop, it may automatically produce the invoices for your customers, which means you wouldn’t need to re-create the invoices as you would already have them.  You would just need to find a way to import the sales information from your e-commerce shop into your account’s software.

Is there software I can use to link my paid invoices straight to my tax return figures?

The easiest way to ensure your invoices are linked to your tax return is by using accounts software, like QBO, to issue your invoices.

If you are using an external system to manage projects or invoice customers – like Zoho or WooCommerce for example – you can use 3^rd party apps to automatically link the software to your accounts software and your sales information can be pulled through, so you don’t need to duplicate the work you have done with creating invoices.

Do I need to use accounts software to produce my accounts?

By April 2023, all VAT registered businesses, sole traders and landlords that meet the requirements must submit their figures quarterly to HMRC as per the rules of Making Tax Digital.  Using MTD compliant accounts software to record all of your incomings and outgoings will make it so much easier for you to do this.

Not only will it help you meet the requirements of MTD but using accounts software can help you to improve your cashflow, have an accurate and up to date picture of your business, and help you to be able to grow the business and achieve your goals.

If I use QBO, do I need a bookkeeper?

The software companies have been quite clever in their marketing and have made it look like using the software is as easy as clicking a couple of buttons, and in some ways that is true.  However, you do need to have an understanding of where the various numbers should appear in your accounts so that you can make sure you are entering the information correctly.

I have had clients come to me who have been doing their own bookkeeping but now they want some help and I have found several big mistakes in how items were recorded that if I hadn’t picked up – would have resulted in the client having a very large tax bill due to overstating their income.

You may not necessarily need a bookkeeper, though I do advise all businesses to have one to ensure they are entering all their information correctly and meeting all of their legal obligations.  It may be that you do the bookkeeping yourself but have a bookkeeper on hand to ensure the information is entered correctly and to help provide you with support.

If you do want to do the bookkeeping on your own, I would advise that you get training on how to use the software.  I have a number of PDF help sheets on my website, can provide 1:1 training on QBO and I also have an online 5-day self-study course that will teach you the basics of using QBO.  It will help you to understand how to create nominal codes, create products and services, how to create customers, issue invoices and how to receive payments, ensure you are dealing with suppliers correctly, how to correctly use the bank feed to help reduce duplicate transactions and show you how to access some of the basic reports.  The course doesn’t teach you how to do the bookkeeping but will help to ensure you are using the software correctly.

What does reconciling accounts mean and why is it important?

Reconciling your accounts is the process of comparing two sets of data to ensure the figures agree and are correct.  For example, your bank account – you would compare the information on your actual bank statement with the information you entered into your accounts software to make sure all transactions are included, and that the information is correct.  It is extremely important that you do this even if you are using a bank feed in accounts software like QBO or Xero because sometimes transactions do get missed.

Going through and reconciling your accounts each month also helps to confirm the accounts are accurate and complete.  Checking that all customer invoices and payments have been entered correctly and to the correct customer account can help you to see if any customers owe money and help improve your cash flow.  It can also help you to spot amounts posted to the wrong account – for example, if you accidentally recorded a transfer of money to a savings account as income.

By reconciling your accounts, you are ensuring that the information is accurate.  This will help to give you a clear picture of the financial situation of your business and allow you to make those important business decisions so you can grow your business and achieve your goals.

If you have any questions about hbookkeeping or keeping your accounts, feel free to e-mail me and I will get back to you! I am going to try and do this type of FB live and blog post a couple of times throughout the year, and I am thinking about doing a specific Q&A webinar, so please keep your eyes open for any future Q&A sessions so you can get your questions to me!

The May 2021 Facebook live talked about how a bookkeper can help someone to understand where their business is at throughout the year and where they have room to grow so I wanted to add the information into a blog post for you.

Do I need a bookkeeper?

The first question you really need to ask yourself is “Do I need a bookkeeper?” and the answer to this is going to be different for everyone, and it will also be different depending on what point you are at with your business.

For example, if you’ve just started out with your business and haven’t yet got a lot of income coming in, and think you can manage things on your own, you may decide that at this point in time, you do not need a bookkeeper.  Six months down the line business is booming, you are trying to keep on top of orders, and deal with the marketing, and deal with the accounts, and deal with customer queries, and still have time for yourself and your family – you may decide that you need to start outsourcing some items and perhaps getting a bookkeeper is a good idea.

Another question is, “Do I really understand how to correctly record my financial information and am I meeting all of the legal obligations that I need to in terms of submitting information to HMRC or Companies House”?  If you aren’t sure whether what you are doing is correct, it’s time to seek out some help from a bookkeeper.  You will want to ensure that the bookkeeper you choose is someone you can work with, that they are experienced and knowledgeable about the software you would like to use, that they are registered with either a professional bookkeeping body like The Institute of Certified Bookkeepers or The International Association of Bookkeepers or even with HRMC for Anti-Money Laundering Regulations Supervision, and that they are properly insured.  Not everyone that claims to be a bookkeeper is registered for AML supervision and as a regulated profession it is an absolute must that they are.

How can a bookkeeper help me with my business?

By having a bookkeeper, you can be confident that they will be able to provide you with proper support and advice when it comes to how to keep your accounts, what your legal obligations are, and some bookkeepers can also provide you with tax and/or payroll advice.

Here are 5 ways a bookkeeper can help you with your business:

1. Frees up your time – A bookkeeper will be able to help free up the time you would have spent on the accounts meaning you can then put that time to better use by using it to promote your business, helping your customers, or even getting your weekends/evenings back so you can relax.
   
2. The accounts will be done correctly – A qualified bookkeeper will know exactly how the accounts will need to be done.  They will understand how to categorise the money coming in and out of the business, ensure that you have all the receipts attached to the accounts and that your bank accounts have been fully reconciled.  This will in turn help you to have a better understanding of the financial picture of your business but also means that if HMRC checks your accounts, they are less likely to find any mistakes and fine you.
   
3. Gives you a better idea of the financial picture of your business – As the bookkeeper will be ensuring that your accounts are kept up to date on a regular basis, you will have a more accurate picture of the financial situation of the business, meaning you can make important business decisions like whether you can afford to hire new staff or buy a new laptop, or if a marketing campaign worked.
   
4. Improve your cash flow – By keeping the accounts up to date, you will have an accurate picture of who owes you money, and who you owe money to.  This can really help you to have a better handle on your cash flow and ensure that you are being paid by your customers on time, but also that you are paying your suppliers on time.
   
5. Make sure you are meeting your legal obligations – Having a bookkeeper on hand who can help you to ensure your accounts are up to date on a regular basis, will also mean that they can help you with filing your VAT returns on time, which helps you to avoid any fines and can help with ensuring your year-end tax return is ready to be filed way before the deadline, and they can even help you to have an idea of what amount of tax you will owe throughout the year.  They will also be able to ensure that you are meeting your obligations in terms of Making Tax Digital.

Can a bookkeeper really help save me time and money?

The answer is absolutely!

Your time is very valuable, and you have a lot of demands on your time.  Not only do you need to fulfil customer orders and support your clients, but you have to grow your business, deal with ordering stock, managing employees if you have any, dealing with the day-to-day admin, and then you also have responsibilities outside of work!  In the evenings, you spend 30 minutes on your accounts trying to ensure it’s all entered correctly, ensuring every transaction has been accounted for, looking up online how to categorise something, maybe searching online for how to use the accounts software, by the end of the 30 minutes you feel more stressed out and unsure if things have been done right, and you are doing this every single day of the week.  By the end of the week, you have spent 3.5 hours on your accounts when you could have been using that time for something else – either for the business or personally.

A bookkeeper can help you to claw back that time!  Think about how much more time you would have, if all you had to do was provide the receipts and information to the bookkeeper, and they dealt with ensuring that all the information was correctly entered into the accounts?  Think about not only the time you would have saved, but how much less stressed you would be.

This testimonial from a client demonstrates how a bookkeeper can help you. “I no longer need to read (and re-read, and re-read without understanding) all the HMRC regulations. I can clearly see how my business is doing, financially. I know where I am spending too much money for little return so I spend more wisely and effectively on advertising, marketing, training etc. Arianna has advised me on setting up savings accounts so that I can plan how to grow my business further. She has kept me up-to-date with changes in regulations and what it actually means for me personally, my business and my future plans in terms I can understand and apply to my business plan.”

Money – now that is something that all businesses need to be very careful about, especially if they are brand new and still growing.  What happens if you are doing your own accounts and instead of categorising a transaction the way it should, you categorise it wrong and it ends up causing you to have a huge tax bill?  I have had people come to me to do their accounts for them, and while I have been going through and tidying up the accounts, I have come across times where clients have actually categorised transfers of money from their main bank account to the savings account as income which is not correct at all.  If I hadn’t spotted that issue, it could have caused the client to be paying three times the amount of tax they should have due to the inflated income!  I was able to save that client from a huge tax bill.  Another example, a client hadn’t realised that they had paid for a VAT return twice because they hadn’t allocated the first payment correctly within their software.  When they asked me to reconcile their accounts and I realised what had happened, they were able to receive almost £2000 back from HMRC for the duplicate payment.

Bookkeepers often work closely with accountants and while you might think it would be more costly to have a bookkeeper and an accountant, in fact, it’s more efficient from a money perspective and here’s why. Please note that the names and amounts used in the following example are all fictional and just for illustration purposes:

Jane is a bookkeeper. She charges £20 per hour for her services. She gets financial records in order so that they can then be passed on to an accountant, saving the accountant hours of work.

James is an accountant. He works for £50 an hour. When he receives documents from a bookkeeper, his work takes half the time it otherwise would.

Fred is a business owner. He’s currently paying his accountant, James, £200 per month for four hours of his time. James is spending two of those hours doing bookkeeping tasks for £50 an hour, and the other two are spent doing his accountancy work. Fred could cut his costs by working with Jane. She would do those first two hours of work for a total of £40, and Fred would only have to pay £100 to James. Overall, he’d save himself £60 per month.

In summary, having a bookkeeper can be very beneficial for so many different reasons and they really can help you to grow your business.

If you do have an accountant, then make sure you are all working together as a team and collaborating so that every person on the team is able to bring their skills and knowledge to the table and really help you to grow your business.

I love working with my clients, and their accountants, as it allows me to focus on putting all of the bits of information together into a completed picture for the accountant to file the taxes, but also because it really does help my client to see exactly where their business stands and allows them to make those all-important business decisions and grow their business.

If you have any questions about how to enter the pension information into your accounts, feel free to e-mail me and I will get back to you!

The April 2021 Facebook live talked about being self-employed and how to deal with a private pension so I wanted to add the information into a blog post for you.

Do I need a pension?

The answer to this question is not an easy one and it is 100% a personal choice.  If you are self-employed and are paying the NI Class 2 contributions, you will qualify for the basic state pension or the new state pension (which came into play from April 2016), but the state pension may not be enough for you to live on.  The current value of the new State Pension is £179.60/week for the 2021/2022 tax year.

You could start paying into a private pension scheme or look at other ways to invest your money – for example, putting money into an ISA – which you can invest up to £20,000 for the current tax year.  These sorts of things can help you to be able to have an income once you have retired.

If I set up a personal pension, can this be claimed in my accounts?

As a self-employed person, any private pensions that are set up, are not able to be claimed on your accounts.  If you pay for the pension through your business account, it would need to be recorded as Owner’s Equity.  The reason for this is that the pension is not “wholly and exclusively” for business.

If you were an employer, and you had a pension scheme set up for your employees, the pension contributions paid on behalf of the employees would be an allowable business expense and would be recorded in your accounts.

Can I claim my pension contributions on my self-assessment tax return?

Not all pension schemes work the same way.  Most of them work on the basis of the pension provider adding the additional tax relief to the pension contributions you make, meaning that the tax relief is taken care of straight away.  However, if you are paying a higher rate of tax, or have paid in more than the annual allowance, you will need to enter the pension contributions into a special section on the self-assessment tax return.

At the end of the tax year, your pension provider will send you a pension contributions certificate which tells you how much you have paid in contributions through the year where deductions were made after tax.  You then use this information to enter on your self-assessment tax return.  It will be entered in a separate section to your self-employed income. 

When you are filling out your tax return, before you even get to the sections where you start to fill out the numbers, you will be asked a series of questions so that the return can be tailored to the pages you need to submit.  You will need to say that you have made pension contributions and you will then be able to enter the information provided to you in the tax return.

How do I find the best pension?

As a bookkeeper, I am not qualified to provide financial advice in regards to pensions, so I would advise anyone that is looking to sort out a pension scheme – either for themselves or for their employees – to contact a Financial Advisor and speak with them to ensure that the pension is the right one for them.  While I am not able to advise on the pension scheme, I am able to help with how to enter the information into your accounts.

If you have any questions about how to enter the pension information into your accounts, feel free to e-mail me and I will get back to you!

The March 2021 Facebook live talked about Paper Receipts and I wanted to add the information into a blog post for you.

How long do I need to keep my receipts for?

If you are a sole trader, you need to keep your receipts for 5 years.  If you are a limited company, you need to keep them for 6 years.

It is important to note that the date you need to keep your receipts from is not the date your financial year ends, but it is actually January 31^st after the tax year ends.  This takes into consideration that the end of year tax return must be filed by January 31^st of the next year.  For example, for the 2019-2020 tax year, your tax return doesn’t need to be filed until 31/01/2021.  In that instance, you would then be required to keep your records for 5 or 6 years from 31/01/2021.

You might need to keep your receipts for a longer period of time if you filed your return late, have been investigated before by HMRC or are currently under investigation.

There is no guarantee that HMRC won’t ask to see records that go back further as they can investigate any time period over the previous 2 decades – so you may want to store the receipts for a longer period of time.

Do I need to keep paper receipts, or can I digitise them?

It is relatively new that HMRC are now accepting digitised receipts for most items, which means you won’t need to store the paper copies as long as you have got a digitised copy.

With the various cloud-based software, and in line with Making Tax Digital, you can attach the digital copies of all receipts and invoices to the transactions in the accounts meaning that all of your digitised receipts are in one place.

In line with MTD, there are some special items that must be stored digitally in compatible software, but there are some items that HMRC say must still be stored in paper format and they include links like your C79 (Import VAT certificate).

You can read about the rules around MTD and digital record-keeping by reading VAT Notice 700/22 which you can find here. The relevant section you are looking for is section 4 and more specifically section 4.3. However, this does just relate to keeping records in terms of VAT and digital record keeping. As more information is released about MTD for Self-Assessment Income Tax, I will share that information as well.

When do I have to follow MTD?

Currently, in terms of MTD, only those who have had to register for VAT due to reaching the VAT threshold need to follow MTD, but from April 2022 all VAT registered businesses will be required to follow MTD with those businesses who are self employed or landlords that meet the requirements from April 6, 2023.

It would be a good idea to start getting into the habit now in regard to attaching your receipts in a digital format so that by the time you are required to follow MTD you already have all of your processes in place.

You can refer to an earlier blog post I wrote in July 2020 about the updates on Making Tax Digital here.

What else do I need to know?

There are different ways you can digitise your receipts and attach them to your accounts, especially if you are using cloud-based accounts software.  Some software, like QuickBooks Online, has in-built receipt capture software but I do find it quite basic and not as efficient.

You can just scan/photograph your invoices and receipts and attach them to each transaction manually or you could use 3^rd party software like AutoEntry or Receipt Bank to capture your receipts and send them to your accounts software.  My personal favourite is AutoEntry, and I use this with all of my VAT clients.  It makes capturing the various purchase invoices and receipts and getting them entered into the accounts software more efficient.  Especially the auto scrape feature which can be used to automatically retrieve invoices from many different suppliers.

If you have any questions about what to do with your receipts or about your accounts, feel free to e-mail me and I will get back to you!