Finance

Financial compliance in the UK is tightly regulated by HM Revenue & Customs (HMRC) and, for limited companies, Companies House. Getting your tax registrations, reporting, and record keeping right from the outset is a legal obligation - not a nice-to-have. The penalties for getting it wrong range from fixed fines to daily charges and, in serious cases, criminal prosecution.

This chapter covers the core financial and tax obligations that apply to most UK startups and small businesses. It does not replace advice from a qualified accountant or tax adviser, but it gives you a working knowledge of what needs to be in place before you start trading and what to stay on top of as you grow.

Every business operating in the UK must register with HMRC for tax purposes. The process depends on your business structure.

Sole Traders and Partnerships

If you are a sole trader or in a partnership, you must register for Self Assessment with HMRC. You will receive a Unique Taxpayer Reference (UTR) - a 10-digit number used to identify you for tax purposes. You must register by 5 Octoberin your business's second tax year (for example, if you started trading in June 2025, register by 5 October 2025).

Limited Companies

When you incorporate a limited company at Companies House, you create the company on the Companies House register and HMRC will usually issue the company a UTR. But incorporation does not remove the need to deal with HMRC directly. Once the company starts business activity, you need to make sure HMRC knows it is active for Corporation Tax and then stay on top of the company's separate HMRC obligations. Companies House handles your confirmation statement and accounts filing, while HMRC handles Corporation Tax, PAYE, and VAT.

UTR vs Company Number

Your UTR is your tax identifier with HMRC. Your company registration number is your identifier with Companies House. They are different numbers used for different purposes. You will need both if you operate as a limited company.

VAT is a tax charged on most goods and services sold by VAT-registered businesses. You must register for VAT if your taxable turnover exceeds the VAT registration threshold of £90,000 in any rolling 12-month period (2024-25 threshold). You can also register voluntarily below the threshold, which allows you to reclaim VAT on business purchases.

VAT Rates

• Standard rate: 20% - applies to most goods and services
• Reduced rate: 5%- applies to certain goods and services (e.g. home energy, children's car seats)
• Zero rate: 0%- applies to some essentials (e.g. most food, children's clothing, books)

Flat Rate Scheme

If your VAT-taxable turnover is £150,000 or less (excluding VAT), you may be eligible for the Flat Rate Scheme. Instead of calculating the actual VAT on each purchase and sale, you pay a fixed percentage of your gross turnover to HMRC. The percentage depends on your industry. This simplifies your VAT accounting but means you cannot reclaim VAT on most purchases. It works well for service businesses with low input costs.

Making Tax Digital (MTD)

All VAT-registered businesses must comply with Making Tax Digital for VAT. This means keeping digital records using MTD-compatible software and submitting VAT returns digitally through that software. You can no longer submit VAT returns manually through the HMRC portal. MTD for Income Tax Self Assessment (ITSA) is being rolled out from April 2026 for self-employed individuals and landlords with income over £50,000, so it is worth getting your digital record keeping in order now.

If you employ anyone - including yourself as a company director - you need to register as an employer and operate PAYE. This is the system through which you deduct Income Tax and employee National Insurance contributions from your employees' pay and send them to HMRC.

Real Time Information (RTI)

Under RTI, you must report payroll information to HMRC every time you pay your employees - not at the end of the year. This is done through a Full Payment Submission (FPS) sent on or before each payday. If you need to report corrections or if no employees were paid in a tax month, you submit an Employer Payment Summary (EPS). Most payroll software handles RTI submissions automatically.

Tax Codes

Each employee is assigned a tax code by HMRC, which tells you how much tax-free income they are entitled to and therefore how much tax to deduct. You will receive tax code notifications from HMRC directly, and your payroll software will apply them automatically. If a tax code looks wrong, the employee should contact HMRC - you must apply the code HMRC gives you.

Payment Deadlines

PAYE and National Insurance contributions are generally due to HMRC by the 22nd of each monthfollowing the tax month (or the 19th if paying by cheque). Small employers with quarterly PAYE liabilities under £1,500 may be eligible to pay quarterly instead.

National Insurance contributions (NICs) fund state benefits including the State Pension. The class of NIC you pay depends on your employment status and earnings.

NIC Classes for Business Owners

• Class 1 (employee)- paid by employees at 8% on earnings between £12,570 and £50,270, and 2% above £50,270. These are deducted through PAYE.
• Class 1 (employer) - paid by the employer at 13.8%on earnings above the secondary threshold (£9,100 per year for 2024-25). This is a direct cost to your business on top of wages.
• Class 2- a flat-rate contribution for self-employed individuals (currently £3.45 per week), paid to maintain entitlement to certain state benefits.
• Class 4- paid by self-employed individuals at 6% on profits between £12,570 and £50,270, and 2% above £50,270. Paid through Self Assessment.

Employment Allowance

Eligible employers can claim the Employment Allowance of up to £10,500 per yearto offset their employer Class 1 NIC liability. This is particularly valuable for small businesses with a few employees. You cannot claim it if you are a sole director with no other employees, or if your employer NIC liability in the previous year exceeded £100,000.

All UK limited companies pay Corporation Tax on their taxable profits. Since April 2023, the rate depends on your profit level:

• 19% small profits rate - applies to companies with taxable profits of £50,000 or less
• 25% main rate - applies to companies with taxable profits of £250,000 or more
• Marginal relief- for profits between £50,000 and £250,000, marginal relief applies so the effective rate gradually increases from 19% to 25%

Corporation Tax is self-assessed. You must file a Company Tax Return (CT600) with HMRC within 12 months of the end of your accounting period. However, the tax itself is generally due 9 months and 1 day after the end of the accounting period - earlier than the return deadline.

Allowable Deductions

You can deduct legitimate business expenses from your profits before calculating Corporation Tax. This includes staff costs, office rent, professional fees, software subscriptions, travel, and marketing. Capital expenditure is handled through capital allowances rather than direct deduction. The Annual Investment Allowance (AIA)lets most businesses deduct the full cost of qualifying plant and machinery up to £1 million in the year of purchase.

HMRC requires all businesses to keep accurate and complete records. The specific requirements and retention periods depend on your business structure.

What to Keep

You must keep records of all sales and income, all purchases and expenses, VAT records (if VAT registered), PAYE records, bank statements and paying-in slips, invoices (issued and received), and any other documents relating to amounts included in your tax return. For limited companies, you must also keep board minutes, details of shareholders, and results of shareholder votes and resolutions.

Retention Periods

• Sole traders and partnerships - keep records for at least 5 years after the 31 January submission deadline of the relevant tax year
• Limited companies - keep records for at least 6 years from the end of the relevant accounting period
• VAT records - at least 6 years

Going Digital

With Making Tax Digital now in effect for VAT, digital record keeping is no longer optional for VAT-registered businesses. Even if you are not yet required to comply with MTD, using MTD-compatible accounting software (such as Xero, FreeAgent, or QuickBooks) puts you ahead of the curve. HMRC accepts digital records provided they are accurate, complete, and accessible for inspection.

If you are VAT registered, your invoices must meet specific legal requirements. Even if you are not VAT registered, clear and professional invoicing protects your right to chase unpaid debts and keeps your records clean.

VAT Invoice Requirements

A full VAT invoice must include a unique sequential invoice number, the date of issue, your business name and address, your VAT registration number, the customer's name and address, a description of the goods or services supplied, the quantity of goods or extent of services, the unit price excluding VAT, the total amount excluding VAT, the rate and amount of VAT, and the total amount including VAT. For invoices under £250, you can issue a simplified invoice with fewer details.

E-Invoicing

While the UK does not yet mandate e-invoicing for private businesses in the way some EU countries do, the direction of travel is clear. HMRC's Making Tax Digital programme is progressively digitising tax reporting, and adopting e-invoicing - even voluntarily - reduces errors, speeds up payment, and keeps you prepared for future requirements. Most modern accounting software supports generating and sending invoices electronically.

Raising investment is a critical milestone for many UK startups, and the UK offers some of the most generous tax incentive schemes in the world to encourage early-stage investment.

EIS and SEIS Tax Relief

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) offer significant tax relief to individual investors who subscribe for new shares in qualifying companies:

• SEIS - investors receive 50% income tax reliefon investments up to £200,000 per tax year. The company can raise up to £250,000 through SEIS.
• EIS - investors receive 30% income tax reliefon investments up to £1 million per tax year (or £2 million if at least £1 million is invested in knowledge-intensive companies). The company can raise up to £12 million in total through EIS.

Both schemes also offer capital gains tax exemptions on disposal of shares (if held for at least 3 years) and loss relief if the investment fails. For many angel investors, these tax reliefs are a decisive factor in whether they invest.

Raising capital also overlaps with your company structure and founder arrangements. If you are planning a funding round, read this chapter alongside the business structure chapter and the business partners chapter, and get your investment documents reviewed before you start conversations.