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14 Min. Read

FreshBooks’ 4 Essentials for Starting a Small Business in the UK

starting a small business uk

You’re starting a new business of your own—how exciting! There are so many great things about being self-employed. No boss to answer to, for starters. You’re doing something you choose, control when you work, fit work around your other commitments, and decide how much you’re going to earn.

Being self-employed can be incredibly liberating and help people to discover that elusive work-life balance.

But it does have its challenges. You no longer have the safety net of a regular salary and all the employment benefits of a pay as you earn (PAYE) worker. The ‘feast or famine’ nature of your income, especially when you’re starting out, is what puts lots of people off trying. And, as a self-employed person, you’re suddenly every department.

You’re in charge of everything: Ordering, invoicing, marketing, accounts, delivering the actual service to the client, or goods to the customer, and staff well-being. (To name but a few of the tasks!)

It’s a lot. It’s not impossible, but there’s a lot of organisation to put in place before you start a small business. You need to weigh up all the pros and cons before you start. Take time to gather all the information you need, and where you can get help with things you don’t know about before you dive into being self-employed.

These are our top four essentials to take you from, ‘That’s a great business idea!’ to, ‘Wow, I’ve just made my first sale!’

Here’s What We’ll Cover:

1. Budget: How Much Does It Cost to Start a Business in the UK?

2. Business Plan: How Do I Start a Small Business in the UK?

3. Legal Structure of Your Business

4. Tax: How Much Can a Small Business Make Before Paying UK Taxes?

FreshBooks Has This All Figured Out

1. Budget: How Much Does It Cost to Start a Business in the UK?

The only way to turn a business idea into an actual business is to work out if you can afford to start.

Setting up a business is going to take some of your own money. So you need to look at your personal budget too. You need to plan for all your essentials before you decide how much you can put towards a business.

The type of costs you have depends on your business. You may have a few of these outgoings to consider:

  • Rent on your business premises: Often a quarterly arrangement, rather than a more manageable monthly amount.
  • Utilities: even if you’re working from home, you’ve got energy, water and broadband costs to factor in.
  • Tools and equipment: You may have to invest quite substantial sums of money into your initial essentials.
  • Raw materials: Whether cakes or horseshoes, you’ll need raw materials to create the product you’re selling.
  • Marketing and advertising: Building a new website, search engine optimisation (SEO), business cards, leaflets—wherever you’re going to speak to your clients, you’ll need a budget to be there.
  • Professional advice: Business coach, accountant, solicitor, financial adviser, SEO expert—good professional advice right at the start of your business can be the most valuable thing you do with your money. You can’t be an expert at everything, and sometimes the most cost-effective way is to hand particular jobs over to people who are.

There are all kinds of costs involved in starting up your business. Some are one-offs that you’ll invest and never need to repeat. Some are regular, fixed or variable costs that can’t be avoided. It might be helpful to divide your initial outlay into two lists: Must-haves and nice-to-haves.

Must-haves are things like government requirements, insurance and legal compliance. You must make sure you’ve got enough money for all of them when you’re starting a business.

Everything else is a nice-to-have that you might want, but don’t need to start a business. These financial costs can be written into your medium or long term plan.

Go on, give it a try: Organise your self-employed business costs into these two columns and add up the totals. Remember, you only need enough for the first column and you’ve enough for the foundations of your new business.

How Can I Start My Own Business With No Money?

Thinking about the cost of starting a business can be quite disheartening. It’s important to remember that you are a valuable resource. Your skills, experience and knowledge are already paid for. And your creative, adaptable mindset is priceless.

Some businesses need far less cash at the start than others. Now that you’ve got your list of start-up costs, you’ll know if your business idea is one of them. Often, service-based businesses need less money up-front, especially if you’ve already got the necessary equipment.

For example, a tutoring service for primary pupils only requires investment in stationery and a few basic teaching resources. The teacher’s skill is the actual service being sold, and that price has already been paid. But if you’re setting up as a mobile auto mechanic, you’re going to need a suitable van, a full set of tools, and the right safety equipment as a bare minimum.

Look for Free Stuff

There are so many free online resources that cover several elements of being self-employed. For example, website creation and hosting. And for your SEO and online visibility, Google Adwords, LinkedIn, Twitter, Facebook, and Instagram are all free of charge. New, cost-free platforms are being created all the time.

In terms of training, many individuals and businesses share their content without a paywall. That’s everything from information hubs like FreshBooks’ to Her Majesty’s Revenue and Customs’ (HMRC) webinars and videos about filing tax returns.

Obviously, you need to use your discretion and look at more than one source—unless it’s completely authoritative, like HMRC. Not everything that’s free is reliable, but it’s not all bad either.

FreshBooks invests in content because we feel its useful to our customers. And we insist on consistently high-quality. Many businesses feel the same way, and this is of enormous benefit to people like you who are just starting a business.

Investors

A whole new way of generating seed money started because of the internet. Crowdfunding sites, like Kickstarter, allow people to give anonymous donations to new companies they’re interested in. In exchange, they get free thank-yous of some kind.

This might be a good option before you start a business, although it’s not a guaranteed amount of money. But it’s also not giving away a portion of your company, and some of these platforms have a pre-order option that can be very useful.

You could also become a business partnership with an individual who wants to invest. This changes the legal structure of your business—more on this later—so you need to look at the whole financial picture to work out the best thing for you. Obviously, you share the business’ ownership and profits with your business partner.

Loans

If you’re starting a business, you usually apply for a business loan from a bank or other financial institution. You get a lump sum up-front and repay it, with interest, over time. Not only does this cost you money, but it is an extra risk for someone that’s newly self-employed. Even if the business fails, you still have to repay the loan.

Government Start-up Loan

This is an unsecured personal loan that’s part of a government-backed scheme to support people trying to start a business. You can borrow between £500 and £25,000 at a 6% fixed rate of interest. The loans can be agreed on a repayment plan between one and five years. There are no application or early repayment fees.

The eligibility criteria for a government Start Up Loan starts with the basics of being over 18, you live in the UK and plan to start a business (or have started a business) that’s been trading for fewer than 24 months. They also have set rules concerning the purpose of your loan, that the business you’re starting fits their criteria, and that you can repay the loan.

Which leads seamlessly into FreshBooks’ second essential for starting a business—writing a business plan.

2. Business Plan: How Do I Start a Small Business in the UK?

Having all the details of where you’re going in your head is not the same as having a business plan. There are two reason you need a business plan: So you can plan the growth of your business, and show potential investors that your new business is a good proposition for them.

When you’re first starting a business, it’s exciting to take your business idea, work through all the pros and cons, and then bring it to life in your business plan.

In your business plan, you’ll need to include “objectives, strategies, sales, marketing and financial forecasts.” A business plan helps define your idea, identify any issues or problems in advance, and set out your business goals. It’s a living document that should be revisited and reviewed regularly. That way your business plan becomes another means of measuring your business’ success.

A business plan is the ‘measure twice, cut once’ of starting a business. When you’re running a self-employed business, you’ll need to avoid wasting both time and money as much as possible. Your business plan is a superb source of information for you and any potential investors.

As the Prince’s Trust points out, a business plan should answer the question: “Why will your business succeed when so many others fail?”

To do this when you’re starting a business, you need to be clear, concise and demonstrate knowledge of your market. Use simple language and talk about specific, realistic numbers and timelines. You might want to get some help with structuring your plan. Lots of templates are freely available on good-quality websites, like the Prince’s Trust, and are a great place to start.

3. Legal Structure of Your Business

In the UK, most businesses register as one of three legal identities: Sole trader, partnership or limited company. There are government regulations that govern each business definition. As you’re setting up a self-employed business, it’s crucial to make sure you make the right decision and fulfill all the legal requirements of your business structure.

Sole Trader

As an individual running your own business, you are classed as a sole trader and self-employed. This is the most common structure for small businesses is the UK. You’ll pay tax on your profits, then you keep the rest of the money you make. You’ll need to make sure that you have the capacity to cover any business losses, as you are entirely responsible for your business debts.

When you’re setting up a new business as a sole trader, you need to follow the rules of choosing a business name. You don’t have to register your name with Companies House or have a business bank account, although this can make record keeping much easier.

It can be your name or a separate business name, whichever you decide. But you have to make sure that your sole trader business name isn’t the same as an existing trademark, or considered to be offensive or sensitive.

You are not allowed to add ‘limited,’ ‘limited liability,’ public limited company, or their common abbreviations to your business title—they designate a different kind of business structure.

All of your business paperwork must include your business name and your own name.

In the UK, you choose this sole trader small business structure when you earn over £1,000 from your work in any tax year, you want to make sure your benefits access is secure by making Class 2 National Insurance contributions, or you need to provide evidence that you are self-employed.

As a sole trader, it’s your responsibility to register for self-assessment with HMRC. This is how you pay tax on your self-employed income.

Limited Company

Limited companies are legal entities in their own right, separate from you as a self-employed individual. This keeps your personal finances safe from the fate of your business. But you’ll need to make sure you understand all your rights and responsibilities as company director.

As a limited company, you will have to register with Companies House and you’ll definitely need a separate business bank account. As a limited company, you will pay corporation tax on your business profits.

Business Partnership

Setting up a business partnership is the simplest way for two or more people to be in business together. Each partner in the business shares the profits, and is equally liable for any business debts and costs.

Although the term partner implies two people, there can be more than two partners in business together. In the UK, a partner can also be a limited company. As limited companies are legal entities in themselves, they can be classed as a partner in another business.

Starting a partnership has four first steps:

  1. Decide if you’re a limited partnership or a limited liability partnership, and make sure you understand the rules
  2. Select a business name
  3. Choose a nominated partner, who is responsible for the administration and filing of tax records
  4. Register you business partnership with HMRC

There are pros and cons to each type of business set-up and you need to think through which will be the best structure for your company now, and as it grows in the future.

4. Tax: How Much Can a Small Business Make Before Paying UK Taxes?

Now that you’ve got your legal structure sorted out, you can establish your tax liability and how you need to pay that tax.

Sole Trader

Sole traders can earn up to the personal allowance amount before paying any tax. Currently, this is £12,500 a year. Business income between £12,501 and £50,000 owes basic rate of 20% tax. If your takings are between £50,001 and £150,000, then you’ll be taxed at the higher rate of 40%. And over the £150,000 mark its the additional rate of 45%.

You don’t pay corporation tax, but you do have to register for value added tax (VAT) once you hit an annual taxable turnover of £85,000. As a sole trader you’ll also need to pay National Insurance. You pay your tax through the self-assessment system, which means you submit a self-assessment tax return every tax year.

Limited Company

Limited companies pay corporation tax at 19% on all profits. There is no tax-free personal allowance for a limited company. The directors of limited companies need to submit their personal self-assessment tax return and, if they’re paid by the company, pay tax and National Insurance through PAYE.

The company itself must keep statutory accounts, and file an annual corporation tax return with HMRC. Limited companies also need to register for VAT if their taxable turnover hits the threshold.

Business Partnerships

Business partnerships must file a business partnership tax return every year. And then each partner must correctly file their own self-assessment tax return, in which they declare their share of the profits and pay tax on that amount. The same contributions and VAT rules apply.

Be aware that both the Welsh and Scottish ruling bodies have the devolved power to set their own income tax rates, and these will apply if you’re starting your business in one of those countries within the UK.

FreshBooks Has This All Figured Out

In all cases as you’re setting up a business, it’s wise to build in your record keeping from the start. That way, you’ll have everything you need at tax time. This is where FreshBooks really helps small businesses that are just starting out.

FreshBooks’ integrated software’s got everything you need to keep track of HMRC’s requirements: Invoicing, sales figures, accountant access, and bank account merging. You can see the list of fabulous features for yourself. So much of your record keeping is automated, and different types of reports can be generated whenever you need them.

FreshBooks is fully Making Tax Digital-compliant, so when your business gets to the threshold, it’s all ready to submit those VAT returns for you.

Especially when you’re just starting out, having your little pocket accountant makes sure that you’re on top of your cash flow. It evens chases up late invoices for you, so your time is spent with your clients, in your business. You might not need everything we have to start with. You can be confident that FreshBooks will support you as your business grows. 

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