Getting the finances in order is very important if a business is to succeed. However, most business owners do not do it until they are motivated by a new investment opportunity or, in the worst-case scenario, a financial audit. Regardless of the reasons why you are looking for a way to get your finances on the right track, here is a practical guide that explains the measures that you should implement in order to achieve the best possible outcomes.
Consider tax regulations
When starting a business, an entrepreneur must choose between registering as a sole trader and forming a limited company. One of the most important things to consider before making a final decision relates to the taxes that must be paid.
Contractors are required to pay taxes at 40% of profits if they make more than £32,000 annually and 45% if their profits exceed £150,000 a year. Self-employed people must also register for VAT if they expect their business’ takings to exceed £79,000 per year.
The profits of a limited company are taxed at 20% for profits up to £300,000 and 23% for profits above this amount. Since running a limited company implies more responsibilities than working as a contractor, many people choose sole trading even though it implies paying higher taxes.
For a person who registers as a contractor, a good idea would be to operate under an umbrella company. Umbrella companies handle payroll, and pay taxes and National Insurance contributions on behalf of the contractors they employ. Additionally, the elf-employed people who choose to work under umbrella companies can become more tax efficient through salary sacrifice schemes (eg, childcare vouchers, pension schemes, and charity donations) made available by these companies. Umbrella companies can also help contractors to make the most out of their contracts by claiming back business expenses relating to work equipment, travel, meals, and accommodation.
Develop a budget
The people who decide to operate without a well-defined financial strategy can run out of money very quickly. This is one of the reasons why many businesses fail today. A budget plan allows business people not only to make funds available for priorities, but also to track expenses, which could help them minimize costs and claim special reductions from HM Revenue and Customs (HMRC).
Choose an accounting program
Today, numerous developers offer a wide range of accounting software solutions appropriate for keeping finances in order. Besides helping contractors to manage finances better than ever before, an accounting program can be used to prepare everything for year-end tax and avoid financial penalties for non-compliance.
Economic feast or famine?
A self-employed person should be ready for anything. Since chaotic market conditions, changing business trends, demanding customers, and increasing competition can make a business close its doors within several weeks, all business owners should plan ahead and save money for the slow times regardless of the type of business they run.
Establishing good financial practices from the very beginning could help businesses avoid penalties, interest associated, and other unnecessary expenses. For the self-employed individuals who do no want to deal with all these, the best possible solution remains working under an umbrella company, which has the legal obligation to deal with HMRC on behalf of contractors.
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