The way corporate tax rate was charged changed in April 2023, when the single rate was replaced with rates based on profits, with the notable impact to businesses with profits over £250,000 who saw rates go from 19% to 25%. Changes like this can have a big impact on your business, but good accounting will help you be ready.
Your small business accounting deserves more attention than ever before. New rules are coming in April 2026 meaning businesses with turnover above £50,000 will need digital software to file reports to HMRC.
Many business owners feel overwhelmed by requirements like these and that’s perfectly normal. But good accounting practices do more than just satisfy HMRC requirements, they help you stay in control, understand your financial position and make smart decisions that stimulate your business growth.
Let’s walk through what you should know about business accounting. We’ll cover choosing an accounting method and managing your tax responsibilities.
Setting Up Your Small Business Accounting System
Your accounting system will serve as the foundation of your business’s financial health. A well laid out system will help you make informed decisions and keep you compliant with HMRC requirements.
Choosing between cash and accrual accounting methods
Cash basis accounting is the default method for sole traders and partnerships to use for income and expenses. This method means you record completed income and expenses, meaning that your self assessment tax return will not generate tax on money you have not yet received.
Traditional accounting, also known as accrual accounting, records income and expenses at invoice or billing time, whatever the payment status. HMRC dictates that Limited companies must use accrual accounting, but sole traders and partnerships can choose.
Your business might need accrual accounting if it deals with complex operations, maintains high stock levels, or seeks financing. Some business lenders want traditionally prepared accounts before they approve any loans
Financial records UK businesses must keep
HMRC requires your business to keep financial records either to provide as evidence for your self assessment, or to include with the tax and VAT returns. How you keep the records is up to you but they must be “accurate, complete and readable”.
As you would expect, the records required for limited companies will be more extensive than for sole traders, but the main basis of the information to be recorded will be:
- Money received and spent
- Company’s assets
- Business’s debts (owed and owing)
- Stock inventory
This information will need to be held in more detail, including supporting documents such as receipts and invoices. Records need safekeeping. How long depends on the type of business set up you have, for example, it’s 5 years for the self employed. Incomplete or destroyed records could mean penalties from HMRC if you cannot meet their requirements.
Selecting the right accounting software for your needs
Making Tax Digital (MTD) is part of the government’s 10 year strategy to improve administration of tax and reduce the tax gap. The requirements of MTD will mean keeping digital records and using software compatible with MTD. To bring tax closer to ‘real time’, quarterly submissions will be made.
Good news is that digital accounting has been around for a while and there are a number of established products such as Quickbooks and Xero, to name a couple, to consider. You should be looking for features that suit your business from your software, but easier invoicing, expense tracking, and financial reporting should be the base line services, including complete accessibility wherever you are.
Creating a Chart of Accounts (COA)
A Chart of Accounts is the term given to the set of financial accounts used in your accounting. The COA puts financial transactions into defining categories such as: assets, liabilities, revenue, expenses, and equity. The structure of the COA is important for both compliance with HMRC regulation but also financial reporting. Financial reporting is key in business practice for insights & decisions that can make or break a business.
Daily and Weekly Bookkeeping Tasks
Good small business accounting starts with consistent bookkeeping routines. Daily and weekly tasks might seem boring, but they help avoid mistakes that can get pricey and save time during tax season.
Recording transactions properly
Accurate business bookkeeping depends on proper transaction recording. HMRC needs you to document all money received and spent. This includes details of assets, debts, stock, and goods bought or sold. You should record transactions quickly, ideally daily, to keep your finances visible.
Managing receipts and invoices
A good system saves you from the dreaded “shoebox of receipts” at year end. Set up a storage system that works for you. If your receipts are physical paper, try to be disciplined to keep them in a folder until you can do your book keeping. However, with most of the population using some kind of smart phone, a photo uploaded to accounting software the moment you have the receipt, gives you both a digital record and the transaction recorded, in one quick process.
To keep cashflow moving, get invoices sent out asap. Invoices sent within a week have much more likelihood of being paid quickly. If you hand write your invoices at a job, make sure you keep both a physical and digital copy.
Tracking business expenses effectively
Good expense tracking lets you offset tax liabilities. Create systematic expense categories like utilities, marketing, and travel. This makes tax returns simpler and financial analysis clearer]. Put every payment in its right category and keep business expenses separate from personal ones. Regular financial reviews help you spot unnecessary costs and improve your profits.
Reconciling accounts regularly
Bank reconciliation each week helps catch problems early. You match your accounting records against bank statements to spot any differences. This process finds errors, stops fraud, and your current cash flow status]. Check that all transactions appear in both your records and bank statement. Break down any differences and make adjustments as needed. Monthly reconciliation works too, but weekly checks help you catch issues faster and give you better insights into your finances]. Again, using software can assist by linking to your bank and will identify mismatched transactions for you.
Monthly Financial Management
A monthly review of your finances gives you significant insight into your business’s health and future direction, but in addition HMRC requires all limited companies to prepare accounts for each financial year so this is an essential task.
Preparing and reviewing financial statements
Financial statements show your business’s financial position and performance. Every limited company must prepare a balance sheet and profit and loss account when filing annual company accounts. These reports must have:
- A profit and loss account (or income statement)
- A balance sheet signed by a director
- Notes to the accounts
- Group accounts (if applicable)
Private companies must submit their accounts within 9 months of their accounting reference date, while public companies get 6 months].
Managing cash flow for business stability
Poor cash flow management can lead to financial trouble and many businesses fail due to cash flow problems.
You should create weekly or monthly cash flow forecasts that cover at least three months ahead to spot potential issues that could impact your business. Send invoices right after delivering products and services, and ask for deposits or staged payments if possible..
Your cash position becomes stronger when you chase debtors quickly, learn your customers’ payment processes, and avoid keeping cash in unnecessary assets]. A regular monthly finance review that tracks your cash position and aged debtors (unpaid invoices) helps you stay on top of things.
Monitoring tax obligations
It is your responsibility to keep on top of your tax obligations, including VAT. Some ways support that are:
- Gov.uk – your route to the latest guidance, rules and log in for your tax account.
- Use a trained accountant. They keep on top of tax obligations and advise on efficiencies.
- Using accounting software, these will update with regulation changes to help you record the correct information. Many accountants integrate their services accountancy software, saving on processing costs.
- Take some basic book keeping courses.
Learning UK tax requirements will save your business money and reduce stress. Your business’s success depends on handling these tax obligations correctly.
Understanding VAT for small businesses
Your business needs VAT registration when taxable turnover goes beyond £90,000. VAT liability is based on the VAT you charge, less the VAT you have been charged by other businesses. After registration, you’ll need to:
- Include VAT to prices at the correct rate and keep records
- Keep complete records of VAT you pay.
- Submit VAT returns (usually quarterly) of VAT paid and charged.
- Settle your VAT liability with HMRC or claim monies owed.
Businesses can use specialised schemes like the VAT Flat Rate Scheme when annual taxable turnover is £150,000 (excluding VAT). This scheme makes calculations simpler by using a percentage of gross turnover.
Self Assessment and Corporation Tax basics
HMRC’s system for reporting and calculating income tax from sole traders is Self Assessment. You should register by October 5 in your second business year.
Limited companies pay Corporation Tax on all profits and must submit returns within 12 months after their accounting period ends. The Corporation Tax payment deadline falls nine months and one day after your accounting period ends.
Making Tax Digital compliance
Making Tax Digital (MTD) deadlines require self-employed people and landlords with income over £50,000 to use digital records and quarterly HMRC updates from April 2026. That threshold lowers to £30,000 from April 2027.
VA registered businesses must already follow MTD rules and use compatible software for their submissions.
Tax deductions and allowances for small business owners
You can reduce your tax by deducting allowable expenses from profits. These are extensive and vary between business set ups and will have differing rules based on the type of the expense. This is why categorising your expenses really helps when you come to calculating your deductible expenses. Here are some examples of expenses you can deduct:
- Office costs and stationery
- Travel expenses
- Staff costs
- Stock purchases
- Insurance and bank charges
- Premises expenses
- Marketing costs
- Business related training
In addition to expenses, you should explore other areas such as capital allowances that apply to some types of purchases such as equipment and machinery, and home working expenses.
Growing Your Business with Sound Accounting
Sound accounting practices are the foundations of business growth. It’s not just a compliance requirement, they are a strategic tool.
Using financial data to make strategic decisions
Financial data teaches us more than simple performance metrics. Businesses can spot opportunities to save costs, grow revenue, and improve operations by analysing key performance indicators. Good bookkeeping helps make smart decisions about where to invest resources]. Here are the significant metrics you should track:
- Profit margins by product or service
- Cash flow patterns and forecasts
- Return on investment for business activities
- Customer acquisition costs versus lifetime value
The right time to hire a bookkeeper or small business accountant
Your business will hit a point where professional help makes more sense than handling everything yourself]. You’ll know you need professional accounting support when you spend time on your accounts that could be better spent managing your business.
An accountant should know financial regulations inside out, make fewer mistakes, and give insights beyond daily financial management. Their expertise lets you focus on what matters most, growing your business.
Scaling your accounting processes as your business expands
Scaling is different from simple growth. Growth means adding more staff and equipment, while scaling increases revenue and improves profits at the same time].
Digital accounting software is important for scaling businesses, the speed and efficiencies it offers give you faster management and insights, leading to quicker implementation of changes. Make sure your financial processes can grow with your business, its usually at times of growth or difficulties you need to be able dig into your financial health and not the time to have to restructure how you manage the businesses finances.
Money Management
Small business accounting needs close attention, particularly with recent tax changes and upcoming Making Tax Digital requirements. Your business can thrive beyond HMRC compliance through proper financial management.
Whilst it can all sound overwhelming, breaking it down into daily, weekly and monthly tasks can be really helpful. Use software, learn the basics and get professional help to get you started. You’ll feel more in control and empowered for your business.
Reliable accounting systems and consistent bookkeeping practises really pay off for the quick identification of problems, real time financial position, forecasting and ability to see opportunities and strategies.
Smart money management will drive your small business’s success.