Essential Finance Considerations When Setting up a New Business in the UK
Did you know that around 90 businesses were created every hour in the UK in 2022? British people are more inclined than ever to create their own startups, taking control of their income and becoming their own bosses. But, building a business is no easy task! There’s a lot of strategic planning that goes into making it a success, and before you even think about working from home, you need to take care of your finances.
To help you out, we’ve put together the essential financial considerations you need to think about when setting up a British-based company.
Will You Become Self-Employed?
You need to decide whether you’ll be self-employed or an employee when registering your business. If you want to be an employee, you’ll have to register as a Limited Company and fill out your tax returns slightly differently. If you’re self-employed or a sole trader, you’ll be required to fill out a simple self-assessment tax form.
Understand the tax implications of how you set up your business before creating your business plan.
Understand Legal Requirements
Once you’ve finalised how you’re setting up your business, you can start looking into legal requirements. Get to grips with how the tax system works, including how to fill out your tax return and how to save for taxes. In general, we recommend putting aside 10% of your monthly income to go towards your yearly tax bill.
It’s also wise to speak to a legal advisor about complex issues, like licenses, local permits, and employee contracts/pay.
Notes on the Tax System
In the UK, every self-employed individual or business owner is required to fill out a tax return. The tax year ends on April 5th, and between this date and January you must record your profits and losses for the previous year.
Once you’ve filed your return, you’ll be asked to pay tax. This will be a percentage of your earnings minus expenses, and include National Insurance, too. Paying taxes is a legal requirement, and failure to file your return correctly could result in fines, penalties, and criminal charges.
How Will You Fund Your Startup?
Every business, no matter how small, will have initial expenses that need to be covered. The more funding you have, the easier (and quicker) it’ll be to get your company off the ground and start creating income.
There are a lot of different options for business funding. Let’s take a quick look at some of the most popular.
Bank Loans and Credit Cards
A traditional funding route involves help from the bank. Many banks now offer business-specific loans that are designed to give approved business plans a financial boost. Of course, this is a loan that you’ll have to pay back, so it carries some risk. Our advice would be to only take out what you actually need, regardless of what the bank offers.
Outside Investors
Investing carries the perk of only paying back your financiers if your business does well, with the investor bearing the risk rather than your company. Look into angel investors as well as asking friends and family if they’d like to help fund your startup in return for a stake in the company. Or, take inspiration from Project Telematics and look into Kickstarter grants and crowdfunding.
Bad Credit Options
Bad credit can impact your ability to get approved for a loan or credit card and put investors off. Fortunately, there are funding options available if you do have poor credit history, like a bad credit mortgage. Some banks will also give credit cards despite poor credit, with high-interest rates helping mitigate the risk. Look into these to build up your score and provide short-term funding.
Government Grants
The UK government offers a variety of grants for businesses. Unlike a loan, grants never have to be repaid, giving you the freedom to develop your startup without any debt. There are lots of different options available, including funding for businesses working in the sustainability sector or looking to reduce their carbon footprint. We recommend checking out the government website to find all the latest news and grants available.
Do You Need a Financial Advisor?
Whether or not you need a financial advisor depends on a few factors. The first relates to your vision for the company. If you’re setting up a small business with no employees beneath you, it might not be necessary. Self-employment isn’t too tricky to navigate, and some research into how to do your taxes might be enough to get you started.
However, as soon as you’re pumping a lot of money into your business, hiring a financial advisor is a good move. They can help you:
- Create funding strategies
- Allocate your funding
- Cut costs and maximise profits
- Optimise cash flow
- Plan for the future
If you have the money to put aside for a financial advisor, we’d recommend a consultation to learn more about how they can help.
Business Bank Accounts
Setting up a business bank account isn’t essential unless you’re a limited company, but it makes it far easier to separate your personal and business finances. All invoices can be paid into the bank account for simple proof of income and tax requirements, as well as keeping a careful eye on your expenses. Some accounts also have in-built invoicing software that makes it easier to send invoices and keep track of your incomings and outgoings.
It’s also important to note that a business bank account can help create a company credit score. For future business loans, this is a big bonus.
Pensions and Life Insurance
Many employers automatically enrol staff into pension plans and life insurance schemes. Once you’re self-employed, though, these will all come to an end. Consider whether you’d like to continue these programmes and, if so, start researching the best way to set them up as a sole trader.
Final Words
Setting up a new business is undeniably exciting, but don’t let your enthusiasm get in the way of practicalities! Hopefully, this article has shed light on the financial considerations you need to take into account when building your startup and given you the advice you need to kickstart your journey.
