If you are like most UK eCommerce entrepreneurs we talk to, you started your business because either you had an idea for a product(s) to sell or you wanted freedom from the 9-5 grind.
Chances are, you weren’t an accountant or a corporate lawyer in a past life.
This means the whole practice of registering a UK company and paying taxes is brand new to you.
While the process is fairly simple, once you understand it, it is easy to get overwhelmed. If you put off any of the necessary steps, this can lead to some unpleasant surprises in the form of tax penalties.
Fortunately, we’re here to help you avoid that.
In this post, we’re walking through the no-frills beginner’s guide to UK personal and business taxes, as well as how to avoid the most common tax mistakes.
Note: Before we dive in, this post is designed to be educational. We strongly recommend all eCommerce entrepreneurs talk to an accountant or accounting firm, like Bean Ninjas, to get the best advice for their specific financial situation.
Article Contents
What you need to know before setting up a UK company
Registering a new company in the United Kingdom only takes a few hours, but if you do it wrong, you can create a lot of issues.
To set up a company, choose a name, followed by the directors and a company secretary, as well as the shareholders and people with significant control. Finally, make sure you have the documents required to register your company.
The most common setup for an eCommerce company in the UK is to register as a limited company, which can be set up within just a few hours if you have clarity of the requirements. For a more thorough explanation, please visit the official government website here.
Once you have registered your business, there are 3 things you must do each year:
- Submit confirmation statement to Companies
- Submit Annual Accounts to Companies House
- Calculate and submit Corporation tax to HMRC and pay this when due
It is great to plan ahead to pay your Corporation Tax as it can be painful to find that money as you are approaching the deadline to pay. A good practice is to calculate your Corporation tax liability each month and then transfer this money from your main business account to an account setup especially for tax saving.
UK personal income tax
In short, you must remember that the UK has a standard tax-free personal allowance of £12,570 for the 2022/2023 fiscal year.
Ideally, you should pay yourself the tax-free allowance as payroll, and then any business income above that should be legally taxed as a dividend (not a personal payment). This is crucial because once you cross that threshold, you get taxed at a personal income level of anywhere between 20 to 45% (a much higher rate than if you follow the dividend route – 8.75%).
Being mindful of this system will help you save a fortune while keeping a healthy tax record for your business.
One of the benefits of having a limited company is that you can pay yourself using the dividends taxes method above. This tax advantage setup means your dividends are taxed at the lower rate of 8.75% for businesses.
VAT
VAT tax is the Value Added Tax for companies with a turnover higher than £85,000 per year. You must register once you reach this threshold to ensure your tax procedures are in order. To do so, use your Government Gateway user ID, and visit the VAT website registration process described on the official government site.
Once registered you will need to start charging VAT on applicable sales and also keeping records of VAT charged to you through your business purchases so you can claim this back.
Keeping healthy records will make it easier and less stressful for you to submit your quarterly VAT returns and also give you confidence in your compliance.
Pro Tip: If you’ve charged more VAT than you’ve paid, you must pay the difference to HMRC.
4 of the most common business setup and tax mistakes that UK eCommerce businesses make
Here are the most common mistakes that we see UK eCommerce entrepreneurs make and how to avoid them.
Going over the personal income free-tax
As we discussed above, one of the most common mistakes eCommerce entrepreneurs make is ignoring the benefits of using dividends as a form of payment. To avoid that, check that you never pass the £12,570 personal allowance threshold.
Double counting revenue
Another common mistake we see eCommerce entrepreneurs make is counting revenue twice. This is a standard bookkeeping mistake in new eCommerce businesses, given the payment ecosystem surrounding an eCommerce business.
For example, if you are not careful, it is easy to double count sales in Stripe and your bank account. To prevent it, use a specialized ecommerce accounting firm, like Bean Ninjas, to help you keep the books in order, reconcile your bank account each month, and avoid this mistake.
Not saving enough to pay your taxes
Taxes should not be a surprise extra cost at the end of the fiscal year. In fact, we recommend using a system like Profit First, where you put aside tax money into a separate bank account every month. Therefore, you can pay your taxes without any worry about where the money is going to come from.
Not registering for VAT
Another common mistake we see eCommerce entrepreneurs make is not realizing that they need to register for VAT. Whether they grew really fast didn’t know how to register, or most of their sales are international, it doesn’t matter. You still need to register and pay VAT.
As soon as you are VAT registered, we recommend configuring VAT calculation right within Shopify, WooCommerce, or whatever ecommerce platform you are using. This automates the VAT charging to your customers so you are not left out of pocket when you have to do your VAT return.
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Starting a UK eCommerce business is exciting. However, you want to make sure you dot your “Is” and cross your “Ts” to avoid any unpleasant surprises later on.
If you are looking for help with tax planning or accounting for your eCommerce business, learn about our tax accounting services and schedule a call with our team here.
