Tax

The Facebook Live for March 2026 raised awareness of a valuable but often misunderstood government incentive.  It broke down what qualifies as Research and Development for SMEs (it’s broader than you think), explained the difference between the SME and RDEC schemes, and outlined the key information needed to prepare a claim with your bookkeeper or accountant.   The information covered is for businesses that have an accounting period start date of before April 1^st, 2024.

It’s Not Just for People in Lab Coats!

Many business owners hear the phrase “R&D tax credits” and immediately assume it only applies to laboratories, scientists in white coats, or large tech companies developing cutting-edge software.

In reality, that’s one of the biggest misconceptions surrounding the UK’s R&D tax relief scheme.

Thousands of small and medium-sized businesses across industries—from manufacturing and construction to food production and digital services—successfully claim R&D tax credits every year. If your business has invested time and resources into improving products, processes, or services, you may already be carrying out qualifying R&D without even realising it.

R&D tax credits are designed to encourage innovation across all sectors, not just high-tech industries.

You may qualify if your business has:

• Improved a product or service
• Developed a new manufacturing process
• Solved a technical challenge in production
• Built bespoke software to improve efficiency
• Experimented with new materials or techniques

For example:

• A construction company developing a new method to reduce structural load
• A food manufacturer experimenting with new recipes or preservation methods
• An engineering firm creating a more efficient component
• A software agency developing a custom platform for a client

If your team had to overcome technical uncertainty and couldn’t easily find the solution, there’s a good chance it could qualify as R&D.

What Actually Counts as R&D?

For tax purposes, R&D has a specific definition.

A project may qualify if it seeks to achieve an advance in science or technology by resolving scientific or technological uncertainty.

In simpler terms, your project may qualify if:

1. You were trying to improve or create something
2. The solution wasn’t readily available or obvious
3. You had to experiment, test, or iterate to find a solution

Typical qualifying activities include:

• Designing and testing prototypes
• Developing or modifying software systems
• Engineering new components or machinery
• Experimenting with materials or formulations
• Improving production processes or automation
• Conducting technical testing or modelling

It’s important to note that commercial challenges alone don’t qualify. The uncertainty must be technical rather than financial or market-based.

How the SME R&D Tax Relief Scheme Works

The SME scheme is the most commonly used R&D tax relief programme in the UK.

To qualify as an SME, your business must typically have:

• less than 500 staff
• a turnover of under 100 million euros, or
• a balance sheet total under 86 million euros, and
• have an accounting period beginning before April 1^st, 2024. 

Don’t worry if your accounting period begins on or after April 1^st, 2024; that doesn’t mean you cannot claim anything, it just means you could be eligible to claim under the Research and Development merged scheme (RDEC) or the Enhanced R&D intensive support (ERIS).  The RDEC and ERIS schemes replace the SME scheme for businesses that have an accounting period that starts on or after April 1st, 2024.  The qualifying expenditure rules for the two schemes are identical, but the calculation of the credit amount is different.  I will be covering the scheme for claiming R&D tax credits for businesses with an accounting period after April 1st, 2024, in a future Facebook Live.

Under the scheme, businesses can claim an enhanced deduction on qualifying R&D costs, which reduces their corporation tax bill.

Depending on whether the company is profitable or loss-making, the benefit works slightly differently:

Profitable companies

• Receive additional tax relief that reduces their corporation tax liability.

Loss-making companies

• Can potentially surrender losses for a cash credit, providing a valuable cash injection for growing businesses.

For many SMEs, this can represent a significant return on the money invested in innovation.

However, when you are working out if you are eligible to claim R&D Tax Credits, if your business is linked to another business, you need to include those figures in your total.  For example, your business is linked to another if it holds over 50% of the voting rights, and another business holds over 50% of the voting rights in your business.  This is something I will cover in a future Facebook Live.

What Costs Can You Claim?

Another common misunderstanding is that only large equipment purchases qualify. In reality, a wide range of project costs can be included in an R&D claim.

Eligible costs often include:

Staff Costs

• Salaries and wages of employees involved in R&D
• Employer’s National Insurance contributions
• Pension contributions

Subcontractor Costs

• Payments to third-party contractors who worked on R&D activities

Software

• Software licences required for development or testing

Consumables

• Materials used during testing or prototyping
• Components used during development

Utilities

• Proportion of electricity, fuel, or water used for R&D activities

Externally Provided Workers

• Agency staff or specialists brought in to support development work

The key factor is that the costs must be directly related to qualifying R&D activities.

How to Start an R&D Tax Credit Claim

Starting a claim may sound complex, but the process is usually straightforward when broken down into a few steps.  However, this is a specialist area, and the key is to document everything!  What was the uncertainty?  What did you do to try to solve it?  What were the failures and successes?  This information will be used to prepare the report that you will submit with your company tax return.

1. Identify Qualifying Projects

Review your projects over the last accounting period and identify those involving technical challenges or innovation.

2. Gather Financial Data

Compile the relevant costs associated with those projects, including staff time, materials, and subcontractor expenses.

3. Prepare the Technical Narrative

HMRC requires an explanation of:

• The scientific or technological advance sought
• The uncertainties faced
• How the team attempted to overcome them

4. Submit the Claim

R&D claims are typically submitted as part of your Corporation Tax return, supported by a technical report and cost breakdown.

5. Receive the Benefit

Once processed, HMRC will apply the tax reduction or issue a cash payment if applicable.

R&D tax credits are one of the UK’s most valuable incentives for innovative businesses, yet many companies fail to claim simply because they assume they don’t qualify.  The reality is that innovation happens in businesses of all sizes and industries, not just in laboratories or global technology firms.  If your business has spent time solving technical problems, improving processes, or developing new products, it may already qualify for R&D tax relief.

Taking the time to explore the scheme could unlock valuable tax savings or additional cash flow to reinvest in future innovation.

If you think you might need to do an R&D claim, contact me, and we can have a chat.

With the April 2026 start date for MTD ITSA for many, it is a critical time for landlords and sole traders.  This month’s blog post will recap who is affected by the changes, outline the core requirements (quarterly updates and year-end submission), demonstrate how to check HMRC for your mandation date, and provide a clear action plan for the final months of preparation.

It’s Happening.  The time is now.

MTD ITSA, or Making Tax Digital for Income Tax and Self Assessment, is no longer an idea that “might” happen in the future.  It takes effect in April 2026, and we are now in the final countdown to that start date.  This blog post aims to provide a no-nonsense, practical checklist to help sole traders and landlords to be prepared to follow the legal requirements of MTD ITSA.

Who does this affect from April 2026?

When MTD ITSA starts in April 2026, not every sole trader or landlord will have to follow it.  They are staggering the start dates, and when you start will be based on your income from your previous tax return.  It is very important to note that when you have to start following MTD, ITSA is not based on the profit or loss you make, but on the total sales (turnover/income) you have before any deductions have been made.

From April 2026, sole traders and landlords with a total qualifying income of over £50,000 must comply with MTD ITSA.

• If you are a sole trader with no property income, this means your total business income.
• If you are a landlord with no business income, this means your total property income.
• If you have both business and property income, this means the combined total of both

The threshold for those with a qualifying income over £30,000 will be mandatory from April 2027.  It is currently planned that those with qualifying income over £20,000 will need to follow MTD ITSA from April 2028, though this has not yet been fully confirmed.

Even if you do not have to start following MTD ITSA from April 2026, it is a good idea to start putting things in place so that you are ready to comply as soon as you need to.

The Core Requirements (The “What”)

There are several very strict requirements that must be followed when it comes to MTD ITSA.

1. Digital Records: You must keep all business records digitally.  This refers to using software to keep your accounts.  You don’t necessarily need to keep digital copies of your invoices and receipts.  However, it is good practice to ensure your invoices and receipts are able to be accessed easily, just in case HMRC do an inspection on your accounts.  The easiest way to ensure you have the information to hand is to attach a digital copy of the invoice or receipt to the transaction in your accounts software, if that’s possible.

• Compatible Software:  The software you use to keep your accounts must be MTD ITSA compatible and able to send the quarterly reports and final submission to HMRC.  This does not mean you cannot use spreadsheets to prepare your accounts.  If you do use spreadsheets, or if your accounts software cannot communicate directly with HMRC, you can use special bridging software to complete the submissions, but that software must be MTD ITSA compatible.

• Quarterly Updates:  At the end of each quarter, you will be required to submit a quarterly update to HMRC using MTD Compatible software.  The information included in the update will relate to your income and expenses.  At this point, it has been stated that this will not have an impact on the final amount of tax you will owe to HMRC, as that calculation will be done after your final year-end submission has been submitted, which is the same way it has been.  The purpose of the quarterly submissions is to help reduce errors in people’s tax returns, provide real-time information so that you are better able to plan for the amount of tax you might owe at the end of the tax year, and it helps to ensure business owners and landlords are compliant with their tax obligations.

• Final Declaration: At the end of the tax year, you would submit a final declaration to HMRC which will include any other income you may have (savings, pensions, dividends), the final year-end adjustments made to your accounts (for example, depreciation, profit/loss on the disposal of assets), as well as any other information you need to provide to HMRC for your tax liability to be calculated.  After you have submitted the final declaration, you will be provided with your final tax bill, which will outline what tax you owe to HMRC based on the information submitted, and the deadlines for making those payments.

Your Final 2-Month Checklist (The “How”)

The April 2026 start date is fast approaching for sole traders and landlords with qualifying income over £50,000.  HMRC estimate that approximately 864.000 people will be required to follow MTD ITSA from April 2026.  The following 4 things will help you to ensure you are ready from day 1.

1. Confirm your start date:  You can confirm whether you need to start following MTD ITSA from the 6th of April 2026 by checking your qualifying income (business and/or property income) from your 2024/2025 self-assessment tax return.  If your income was over £50,000, then you know you must follow MTD ITSA.  You may also receive a letter from HMRC sometime in February or March 2026 notifying you.  However, it is your responsibility to know if you have to comply with MTD ITSA, so do not rely on being notified by HMRC.  The government website has a tool that you can use to check if you need to follow MTD ITSA, and you can find it here.

• Choose your software:  If you haven’t already chosen what software you will use for MTD ITSA, I strongly recommend that you start looking at the different software that is available and choose now.  You will want to have time to familiarise yourself with the software and to ensure your accounts are all set up on it.  If you do not have any experience with keeping accounts digitally, it is a good idea to contact a bookkeeper who understands the software that you would like to use and ask them to help provide training, etc.  Sadly, using accounting software is not as simple as the software companies make it out to be.  You need to understand where the information needs to go to ensure you are not over- or underpaying your taxes.  Categorising information incorrectly, for example, a loan as income, could be a very costly mistake.  There are a lot of options out there for accounts software – QuickBooks Online, Xero, FreeAgent, Sage, and spreadsheets.  Try some of them out, check the pricing, what is included in the subscription, does it provide everything you will need for your business (i.e., stock tracking, payroll, multicurrency, VAT), and does it come with support.  You need to make sure the software you are using is right for you and your business.

• Get your records in order:  Ensure that your bookkeeping is up to date before April.  You can’t start with a backlog.  You will want to get into the habit of keeping your accounts up to date on a monthly basis, before you need to follow MTD ITSA, as that will take a lot of the pressure and stress away of making sure you meet the quarterly submission deadlines.

• Sign up for MTD ITSA:  If you have a tax agent, you can get them to sign you up or help you sign up for MTD ITSA, or you can do this yourself.  You will need to have your accounts software in place first before you sign up.  You will need to have your Government Gateway details, which would have been provided to you by HMRC when you first became self-employed or a landlord.  You will also need your National Insurance number.  If you do not know your Government Gateway login details, you will need to click on the “problems signing in” link to recover them.  You can access the Government Gateway page here. If you need to sign up for MTD ITSA, you can do so here. If you have a bookkeeper who doesn’t currently act as your tax agent because you have an accountant who submits your self-assessment tax return, but you would like your bookkeeper to submit your quarterly returns, you can appoint them to be a secondary tax agent.  Speak to your bookkeeper about whether they can help you with the quarterly submissions.

Penalties for Non-Compliance

If you do not comply with MTD ITSA, you will be subject to penalties.  HMRC have developed a points-based system where you will be given a set number of points for each late submission.  Once you have received the maximum penalty points allowed, you will face a fine.  There will be a separate penalty system for late payments and non-compliance with the software. 

The point threshold is 4 points for quarterly submissions and 2 points for the annual submission.  For every late submission, you will receive 1 penalty point.  If you reach the maximum threshold of 4 points for late quarterly submissions, you will receive a £200 fine.  If you reach the maximum threshold of 2 points for late annual submissions, you will receive a £200 fine.  Any points earned will expire after 24 months, but only if the threshold has not been reached.  If you have met the threshold of penalty points, the points will only expire after a period of compliance has been met.  For quarterly submissions, you would have to file all returns on time for 12 months.  For annual submissions, you would have to file all returns on time for 24 months.

The penalty system for late payments will involve interest and monetary fines.

• If your payment is 0 to 15 days late, you won’t receive a penalty, but interest will accrue.
• If your payment is 16-30 days late, a 3% penalty will be charged on the tax outstanding as of day 15.
• If your payment is 31+ days late, an additional 3% penalty will be added (making it a total of 6% of the original outstanding amount), plus a second, daily penalty at an annual rate of 10%

It is important to note that HMRC charges interest on day 1 for any unpaid amounts.

If you are using software that is not MTD ITSA-compliant to keep your accounts, you could receive a penalty of up to £400 per return.

If your income is over £50,000, you must be ready by April 2026.  If you are not yet set up with compliant software and a plan, you are at risk of penalties.  Contact me urgently for an MTD setup and support package.

During January’s Facebook Live, I discussed a forward-thinking topic for owners who are considering their exit strategy.  I explained what Business Asset Disposal Relief (formerly called Entrepreneurs’ Relief) is, the eligibility criteria, how it can reduce the Capital Gains Tax Rate to 10% on qualifying assets, and the importance of planning to meet the conditions.

Planning Your Exit

Selling or closing your business is a major financial event.  You need to ensure you follow all the steps to meet your financial and legal obligations.  One of those financial obligations relates to a tax that you will have to pay on profits, which is called Capital Gains Tax (CGT).  Another part of the financial obligations is Business Asset Disposal Relief.  Many people still know it by its old name, Entrepreneurs’ Relief, and it is a way to help lower your CGT bill.  I’ll share a practical “Don’t Lose It” checklist at the end of this session that you can use to make sure you don’t accidentally lose this valuable relief.

What is Business Asset Disposal Relief?

Business Asset Disposal Relief, or BADR, is a tax discount provided by the government as a reward for the time, money and risk a business owner has put into creating and running a business.  It can help a business owner to pay less tax on the profit they make when they sell their business.  BADR can reduce the rate of Capital Gains Tax on qualifying gains from 20% (for higher-rate taxpayers) down to just 10%.  With recent changes to Capital Gains Tax rates, this 10% rate is even more valuable than before – so it’s worth making sure you qualify.  It is important to note that there is a lifetime limit of £1 million of gains that can qualify for this relief.

The government want to encourage people to start and grow businesses, reward entrepreneurs who have built up a business and run it, and make it easier to move on, retire or start another business.

Let me give you an example to show you what this means in practice.  Imagine Sarah, who built her hair salon business over 15 years.  When she sells it for £400,000 profit, without BADR, she would pay £80,000 in Capital Gains Tax at the 20% rate.  But with BADR, she only pays £40,000 at 10% – saving her £40,000.  That’s a significant amount of money that could fund her retirement or her next venture.  The key is making sure you qualify when you sell.

Who can claim it?

In order to claim BADR, you must be a sole trader, a business partner or a director/employee of a limited company.

There is one key condition, though – you must have owned the business (or been a partner or shareholder) for at least 2 years up to the date you sell it.

What business assets qualify?

The business you built has a number of different business assets that would qualify for BADR.

This includes the business itself as a whole (a sole trader business, your share of a partnership, a limited company), selling any shares you have in your own company (though you must own at least 5% of the shares and voting rights), as well as assets you have lent to your business.

It can also include individual aspects of the business, such as customer lists, goodwill (the reputation of the business), equipment, vehicles, premises or stock.

There are some common misunderstandings about what qualifies and what doesn’t.  The following items DO NOT qualify for BADR:

• Buy-to-let or investment property
• Shares where you are just an investor
• Cash in the business bank account
• Assets that are not really used for the business
• Selling assets long before or long after the business ends

People usually lose BADR by accident, and here are a few of the most common traps:

1. People wait too long to sell things.  BADR is for when you sell or close the business, not at a later date.
2. People don’t own enough of their company.  Remember the 5% rule I mentioned earlier?  Oftentimes, directors will dilute their shares by taking on investors or giving shares to family or employees, and they don’t realise they have fallen below the 5% ownership rule.
3. People stop working in the business too early.  For example, they step down as a director, they retire or go part-time, and then they sell their shares.  In order to claim BADR, you must be an employee or director right up to the sale or closure of the business.
4. People pay themselves rent for their own building.  If a business owner owns the shop or office personally, but charges the business full market rent, HMRC will treat the building like an investment, not a business asset.
5. People change the business, which resets the clock.  If the owner of the business changes from a sole trader to a partnership or a limited company, changes the business structure, or swaps shares for a different class of shares, these changes reset the clock, and the 2-year qualifying period starts all over again.
6. There is too much cash or investments within the business.  If the company builds up large cash balances or investments unrelated to trade, HMRC may say that the company is not mainly a trading business anymore, which can then disqualify you from claiming BADR.
7. The business owner assumes the accountant will “sort it later”.  Some people only ask about the tax after the deal is done.  If they have sold shares, left their role, or the business has changed ownership, then they won’t qualify for BADR.
8. People do not understand that BADR is rule-based, and not common-sense-based.  The rules surrounding BADR are very strict and time-sensitive, so making sure you meet all the qualifying rules at the time you sell or close your business is essential.

Here is a short and practical checklist to run through before selling or closing a business to avoid accidentally losing Business Asset Disposal Relief:

BADR “Don’t Lose It” Checklist

✔ Ownership

• Do I own at least 5% of the business or company shares?
• Have I owned them for at least 2 years?

✔ Role

• Am I still a director or employee right up to the sale date?
• Have I avoided resigning or retiring too early?

✔ Timing

• Am I selling the business and its main assets at the same time, or close together?
• Have I avoided leaving assets (like property or equipment) to sell much later?

✔ Nature of the business

• Is the business mainly trading, not holding cash or investments?
• Is excess cash or non-business activity kept to a minimum?

✔ Property

• If I own the business premises personally:
  • Was the business using it as part of the trade?
  • Was I charging below market rent (or no rent)?

✔ Changes

• Have I avoided recent changes that might reset the clock (new shares, restructuring, dilution)?
• If changes were made, has the 2-year rule still been met?

✔ Advice (critical)

• Have I checked all this before signing anything or stepping down?
• Has a tax adviser confirmed BADR in advance, not after the event?

To use an interactive checklist, visit https://www.ihelm-enterprises.co.uk/badr-checklist/ or you can download a PDF version of the checklist here.

Why you must plan ahead

With how time-sensitive and strict the rules are around BADR, you must plan for the future to ensure you are able to claim the tax discount.

The 2-year ownership rule is very strict.  You can’t decide to sell the business, and then qualify for BADR a month later.  You can only qualify for BADR at the exact time you sell the business.

Making changes to your business structure or shareholdings can accidentally disqualify you by resetting the 2-year ownership rule.

It is vital to get advice from a tax advisor long before a potential sale.  As soon as you start thinking about the future of your business and you consider selling it, get in touch with a tax advisor who can help you prepare for that future sale and ensure you can claim BADR and get that tax discount.

Your business is likely your most valuable asset.  Don’t pay more tax than you need to when you sell it.  If an exit is on your horizon in the next few years, let’s talk now to ensure you’re structured to take full advantage of this valuable relief.  Simply send me an email to book a consultation.

During December’s Facebook Live, I explained what the Flat Rate Scheme is, who is eligible, and the specific flat rates for different industries. I provided a clear comparison to standard VAT accounting to help business owners decide if it can simplify their bookkeeping and potentially save them money.

A Quick VAT Recap

VAT stands for “Value Added Tax”.  It is a tax that is placed on goods and services that businesses must pay to HMRC.  The VAT a business charges on their sales (input tax), does not belong to the business, they are simply collecting it on behalf of HMRC.  The amount that a business pays to HMRC will depend on the VAT collected on sales, and the VAT paid on any goods or services that were purchased (output tax).  If more VAT is collected by a business, that is then paid to HMRC.  If the business paid out more VAT on its purchases than it collected on its sales, then the business receives a refund from HMRC for the VAT owed.

There are three different rates of VAT, and the rate charged depends on the product or service:

• Standard Rate: 20% which applies to most goods and services
• Reduced Rate: 5% which generally applies to domestic fuel, children’s car seats
• Zero Rate: 0% which applies to most food, children’s clothing, and books.

There is also the Exempt VAT rate which is for items that are Exempt from VAT and includes things like insurance premiums, loans, most bank charges, selling/leasing/letting of commercial land and buildings.

You can refer to the Government website to find out more about how to treat specific items in relation to VAT.  The information on this page is not exhaustive, so if you are really unsure how to record VAT for something, contact a qualified bookkeeper, accountant, or tax advisor.

The current VAT registration threshold is £90,000, which means that if, during a 12-month rolling period, a business has a VAT taxable turnover of over £90,000, they must register for VAT.  The 12-month rolling period is NOT the same as the tax year.  It runs from January to December, February to January, March to February and so on.  This is one reason it is so important to ensure your accounts are fully up to date at the end of each month, so that you can see when you are approaching the VAT threshold and avoid any fines or penalties for not registering on time.

There are 2 main VAT schemes in the UK.  The Standard VAT scheme and the VAT Flat Rate Scheme.  The Standard VAT scheme is where you record the correct VAT rate as per any invoices/receipts you received, and the VAT on your sales at the correct rate, submit your returns to HMRC, and then the difference is either refunded to you or paid by you to HMRC.

There is also Accrual VAT accounting, which is simply recording the VAT as per the date of the invoice, or Cash VAT accounting, where the VAT is recorded on the date the transaction was paid.  Some businesses may belong to the VAT Annual Accounting Scheme, which means they only file one VAT return a year, and others will submit returns to HMRC quarterly.

There are then a couple of other schemes that only retail businesses or those that sell second-hand goods can use, such as the VAT margin scheme (the business pays VAT on the value added to the goods you sell) and the VAT retail scheme (the business calculates the VAT once with each VAT return instead of calculating it for each sale you make.  There are very specific requirements for these schemes.

The Flat Rate VAT scheme is designed to make life easier for small businesses.

How does the VAT Flat Rate Scheme Work?

The Flat Rate VAT scheme allows a business to work out what VAT they owe to HMRC based on a fixed rate percentage, based solely on the total sales a business has.  This percentage is lower than the standard 20% rate, and the business is allowed to keep the difference. The business does have to record the VAT on purchases, but these figures are not taken into account when the amount owed to HMRC is calculated.  However, there are certain capital purchases over £2,000 where the VAT for those items can be claimed, but this is done outside of the Flat Rate Scheme.  You can find out more about the special considerations for capital purchases on the Government website.

Who is Eligible for the Flat Rate Scheme?

To use the Flat Rate Scheme, your VAT taxable turnover must be £150,000 or less, excluding VAT, in the next 12 months.  To work out your VAT taxable turnover, you need to look at the total of everything you have sold that is not Exempt from VAT.

There are some very strict rules about who cannot join this scheme, which include if you left the Flat Rate Scheme in the last 12 months, have committed a VAT offence in the last 12 months, or if you have joined a margin or capital goods VAT scheme.

If you join the Flat Rate Scheme, you cannot use the Cash Accounting Scheme.

You must leave the Flat Rate Scheme if any of the following apply:

• You are no longer eligible to use the scheme
• Your turnover in the last 12 months was more than £230,000 (including VAT), or you expect it to be in the next 12 months
• You expect your total income in the next 30 days alone to be more than £230,000 (including VAT).

You can visit the Government website to find the instructions for joining the Flat Rate Scheme and then how to leave the scheme if necessary.

Finding Your Percentage & The “Limited Cost Business” Rule

The percentage you use for calculating how much VAT you need to pay to HMRC depends on your industry.  You may also pay a different rate if you only spend a small amount on goods.  During your first year as a VAT-registered business, you are eligible for a 1% discount.

Here are some examples of the percentage used in the Flat Rate Scheme:

• Catering services, including restaurants and takeaways from 1 April 2022: 12.5%
• Hairdressing or other beauty treatment services: 13%
• Pubs from 1 April 2022: 6.5%
• Retailing food, confectionery, tobacco, newspapers or children’s clothing: 4%
• Retailing not listed elsewhere: 7.5%

You can read the full list of percentages used for different types of businesses on the Government website. 

If you spend a small amount on goods, then HMRC classifies you as a “limited cost business”.  This applies if your goods cost less than 2% of your turnover or £1,000 a year (if your costs are more than 2%).  That means you pay a higher rate of 16.5%.  If your business does not fall under the “limited cost business”, then you would use the percentage for your industry that HMRC provides.  You can calculate if you need to pay the higher rate by going to the Government website and using their in-built assessment tool. If you are a “limited cost business”, this can make the Flat Rate Scheme unattractive, as you aren’t making much of a saving.  It will primarily affect service-based businesses.

What are the Pros vs Cons of the Flat Rate Scheme?

One of the biggest pros of the Flat Rate Scheme is that it allows for much simpler bookkeeping.  While you still need to track the VAT on every purchase or sale, you just need to calculate the VAT owed using your VAT-inclusive turnover and the fixed percentage provided by HMRC.  A lot of the cloud-accounting software out there even makes the calculations simple by allowing you to enter the flat rate percentage into the settings.  You would enter the sales and purchases as normal, applying the correct VAT rate, and the software would automatically calculate the amount you owe to HMRC

Another big pro is the fact that you could reduce your costs and make a small financial gain if your flat rate is favourable.  The Flat Rate Scheme allows businesses to use a fixed percentage which is lower than the standard 20% rate.  If you are in your first year of joining the scheme, you can also get a 1% discount.  Instead of having to pay the whole 20% of VAT to HMRC, you would be paying out a lower amount, leaving you with the difference as profit.

As you know what percentage you will pay to HMRC for VAT, you can better predict what your VAT liability will be.  This can help with planning the future of your business and allows for more accurate budgeting.  You will have a much better idea of how much money to set aside to pay the VAT bill, which potentially frees up more funds to reinvest in your business so you can grow it.

What about the cons – the main one is not being able to reclaim VAT that you paid out for purchases.  The only time you would be able to reclaim the VAT is if you spend over £2,000 on capital assets.  This is different to the Standard VAT Scheme, as with that scheme you can reclaim VAT on all purchases.  If you spend a high amount on purchases, using the Flat Rate Scheme could be more expensive for you.  The ”Limited Cost Business” rule also makes the Flat Rate Scheme more expensive for certain types of businesses.  This scheme is intended for small businesses, so if your business grows and your turnover increases, you could end up paying out more to HMRC than you would if you were on the Standard VAT scheme.

The Flat Rate Scheme can be a great simplification, but it’s not for everyone.  The “limited cost business” rule is a major trap.  It’s really important that before you join the Flat Rate Scheme, you look at all the factors that affect your business and work out whether it is more financially viable for you to join the scheme or not.

Before you join or leave the scheme, let’s run the numbers together to see what’s more profitable for you. Simply send me an email to book a consultation.

On 27th November 2025, the Chancellor, Rachel Reeves, announced the Autumn Budget 2025. While there were a couple of announcements that affect businesses, the majority of the budget will impact individuals in many ways.

Here are the key highlights of what businesses need to be aware of.

1. Tax Thresholds Frozen until 2031
   
   The tax thresholds for Income Tax and National Insurance will remain at their current levels until April 2031.
   
   Income Tax:
   Personal Allowance: Up to £12,570, your tax rate is 0%
   Basic Rate: From £12,571 to £50,270, your tax rate is 20%
   Higher Rate: From £50,271 to £125,140, your tax rate is 40%
   Additional Rate: Over £125,140, your tax rate is 45%
   
   National Insurance:
   Employees (Class 1 NICS)
   Pay of up to £242/week or £1,048/month: 0%
   Pay from £242 to £967/week or £1,048 to £4189/month: 8%
   Pay over £967/week or £4,189/month: 2%
   
   Employers (Class 1 Category A NI Contributions Only):
   Pay from £96 to £481/week or £417 to £2,083/month: 15%
   Pay from £418.01 to £967/week or £2,083.01 to £4,189/month: 15%
   Pay over £967/week or £4,189/month: 15%
   
   Self-Employed (Class 2 and Class 4 NICS):
   Profits up to £6,844 – Class 2 (voluntary): £3.50/week
   Profits from £6,845 to £12,569 – Class 2 (deemed paid): £0.00/week
   Profits from £12,570 to £50,270 – Class 4: 6%
   Profits over £50,270 – Class 4: 6% on profits from £12,570 to £50,270, plus 2% on profits over £50,270
   
   To find out more about the current National Insurance Rates, please visit the Government website.
   
   
2. Minimum Wage will be increased by 4.1% from April 2026
   
   From April 2026, the National Minimum wage paid to workers will be increased:
   – Over 21 years of age will increase from £12.21/hour to £12,71/hour
   – Between 18 and 20 years of age will increase from £10.00/hour to £10.85/hour
   – For 16 and 17-year-olds, and apprenticeships it will increase from £7.75/hour to £8.00/hour
   
   
3. Tax on Dividend Income will rise by 2% points from April 2026
   
   If you receive Dividend income, you currently pay tax on anything that is over your personal tax allowance and the annual dividend allowance, which is £500.00. The ordinary rate will increase from 8.75% to £10.75%, with the upper rate going from 33.75% to 35.75%. The additional rate will remain at 39.35%.
   
   
4. Pension Salary Sacrifice changes
   
   Currently, employees can sacrifice a portion of their salary each month to be paid into a pension plan provided by the employer, and this is tax-free. From April 2029, employees will have to pay National Insurance on any amount of salary sacrificed for their pension above £2,000.
   
   
5. Changes to the Main Rate for Plant and Machinery
   
   Full expensing for main-rate plant and machinery will continue, in line with the 2024 Corporation Tax Roadmap. However, some notable changes are coming:
   
   Starting January 1, 2026, assets that don’t qualify for full expensing (such as those used for leasing or by non-corporation businesses) will be eligible for a new 40% first-year allowance instead.
   
   From April 2026, the standard writing-down allowance rate drops from 18% to 14% (effective 1 April for corporation tax and 6 April for income tax).
   
   
6. Business Rates for Retail, Hospitality and Leisure Properties
   
   The government is introducing a permanent lower rate structure for Retail, Hospitality and Leisure (RHL) properties through a new five-category multiplier system. This creates a clear distinction between RHL and non-RHL properties, plus a separate band for high-value properties.
   
   The five categories and what their Rate will be from 2026/27:
   Small Business RHL: RHL Properties under £51k RV – 38.2p
   Standard RHL: RHL Properties £51k – £499k RV – 43p
   Small Business (non-RHL): Non-RHL properties under £51k RV – 43.2p
   Standard (non-RHL): Non-RHL properties £51k – £499k RV – 48p
   High-Value: All properties £500k+ RV – 50.8p
   
   The new Small Business RHL multiplier at 38.2p represents a permanent lower rate for qualifying retail, hospitality and leisure businesses – a notable reduction compared to the current small business multiplier of 49.9p.
   
   It’s worth noting that revaluations will also take place from April 2026, so some businesses may still experience bill increases despite the lower multipliers if their rateable value has increased.
   
   
7. Small Business Rates Relief (SBRR)
   
   Small Business Rates Relief will now include a 3-year grace period (up from 1 year), giving businesses more time to keep the relief on their first property when they expand into additional premises.
   
   
8. Business Rates Retention Pilots
   
   The business rates retention pilots that are taking place in Cornwall, the West of England and Liverpool City will be extended to 2028/2029.
   
   
9. Corporation Tax Penalties
   
   The penalty for submitting a Corporation Tax Return late will double from April 1st, 2026. Currently, if your Corporation Tax Return is 1 day late, you will receive a fine of £100.00. If, after 3 months, your return is still late, you will be fined £200.00. After 6 months, HMRC will estimate your Corporation Tax Bill and add a penalty of 10% of the unpaid tax. If you still have not submitted your return after 12 months, then a further 10% of any unpaid tax will be charged. If your return is late 3 times in a row, the £100 penalties are increased to £500 each.
   
   This means that from April 2026, the £100.00 fine will be increased to £200.00 for being 1 day late, and £400.00 after 3 months. If you submit your tax return late 3 times in a row, the fine will increase to £1,000.00.
   

You can read more about the Autumn 2025 Budget on the Government website.

During November’s Facebook Live, I focused on small, limited companies. I clarified two key ways of taking money out of the business. I explained the rules and tax implications of director’s loans (including the £10,000 threshold and s445 tax), and contrasted it with the process and tax efficiency of paying dividends.

One of the first things to understand about limited companies is that they are a separate legal entity from the directors and shareholders.  Unlike a sole trader, you cannot just take money out of the business anytime you like, as that money does not belong to you; it belongs to the limited company.  To withdraw money from the limited company, you need to either take it as a salary through the PAYE scheme, where you are an employee of the limited company, or through the two options I will be discussing today – director’s loan and dividends.

Dividends: A Share of the Profits

Let’s start by explaining what dividends are. Dividends are a payment a company makes to its shareholders if it has sufficient post-tax profits.  They are used as a way for companies that are profitable to reward their shareholders for investing in the company.  As dividends are reliant on the business being profitable, dividends are not a mandatory payment.  A company must ensure that it is not paying out more in dividends than the available profits from the current and previous financial years.  The amount paid can also be changed at any point in time, or even suspended, depending on the company’s financial situation.

Dividends can only be paid to shareholders if they have been declared properly within a board meeting, with it noted in the meeting minutes.  After the dividends have been declared, the proper paperwork must be created, which is called a dividend voucher.  It must show the date, company name, the names of the shareholders being paid a dividend, and the amount to be paid.  A copy of the voucher needs to be given to the recipient, and a copy kept by the company.  The most common type of dividends is a cash dividend, but companies could also choose to issue additional shares to their shareholders.

How are Dividends affected by Tax?

Neither the company nor the director has to pay National Insurance on any dividends received.  However, the director must pay income tax on dividends that exceed the current £500 dividend allowance for the 2025/2026 tax year.  An individual’s personal allowance, currently £12,750, is also taken into account.

Once your dividends go beyond these allowances, they are taxed according to your personal tax band:

Basic Rate taxpayers: 8.75% on dividends
Higher Rate taxpayers: 33.75% on dividends
Additional Rate taxpayers: 39.35% on dividends

From April 2026, the tax on dividends will go up by 2% for basic and higher rate taxpayers:
Basic Rate taxpayers: 10.75% on dividends
Higher Rate taxpayers: 35.75% on dividends
Additional Rate Taxpayers: 39.35%

In summary, you only start paying tax on dividends after your allowances are used, and the rate depends on your income tax band.

Director’s Loans: Borrowing from Your Company

Now, let’s talk about directors borrowing money from their company and how that compares to dividends.

A Director’s Loan Account (DLA) is simply a record of money moving between a company and its director.  Think of it like a tab that keeps track of:

• Money the director puts into the company (the company owes the director) and
• Money the director takes out of the company that isn’t salary, dividends, or expenses (the director owes the company).

It’s not a physical account, just a running total of who owes whom.

Here is an example: imagine you and your friend run a small business.  You each have your own personal money, and the business has its own money.

• One day, you pay a business bill with your personal cash.  The business “owes” you.  It goes on the director’s loan account.
• Another day, you take some money from the business to pay for something personal.  Now you “owe” the business.  That also goes to the director’s loan account.

At any point, the running total tells you:

• Positive Balance: the company owes the director.
• Negative Balance: the director owes the company.

Why is a Director’s Loan Account Important?

As a company is legally separate from the director, any money flowing between them has to be tracked properly.  The DLA keeps everything clear and avoids tax complications or accidental misuse of company money.

What are the tax rules if a director owes the company?

Has anyone found the Director’s Loan Account rules confusing in the past?  Share your answer in the comments.

If there is a negative balance on the DLA at the end of the tax year, the director owes the company money.  As long as that balance is repaid within 9 months and one day of the company’s year-end, there are usually no tax issues for the company.

However, if the amount is not repaid to the company within that time frame, the company must pay Corporation Tax on the amount owed at 33.75%.  This is known as s455 tax.  Once the loan is repaid, the company can claim back the tax that was paid, though this may take some time.  It is important to note that if a loan of £5,000 or more is repaid and then re-borrowed within 30 days, the repayment is disregarded, and the tax charge will still apply.  If the loan amount is more than £10,000 in a tax year, a benefit-in-kind charge may also apply.  The director must report the loan on a P11D form, and the company must report Class 1A National Insurance contributions using form P11D (b) by July 6^th, and then pay the amount due.  A benefit-in-kind is a non-cash benefit provided to an employee that has a cash value and is taxable.

If the company has charged the director interest on the loan, they must report that to HMRC, and the company must deduct tax at source at a rate of 20%.

The rules around Director Loan Accounts for companies can become quite complicated depending on how old the loan is, when it was initially issued, when it was repaid or if it was written off.  You can read more about the tax implications and responsibilities of both the company and the director who owes the money on the government website.

What happens if the Company owes the Director?

If you have lent money to the Company, the tax situation is fairly simple.  The company does not pay Corporation Tax on the amount you lend.  If you charge the company interest, that interest is treated as a business expense for the company and as personal income for you.  You must include this interest on your self-assessment tax return.  The company must pay you the interest after deducting basic-rate income tax (20%), and then report and pay that tax every quarter using form CT61.

Key Comparison and Best Practice

The key difference between dividends and DLA is that dividends are a distribution of profit, and loans are borrowing.

The most tax-efficient way for directors when comparing dividends and DLA is to take a small salary as well as dividends.  The small salary keeps things like state pension credits active and can be counted as an allowable company expense.  The rest as dividends reduces the total tax bill because the tax on dividends is lower.  This combination means the director takes home more money, while the company pays less tax overall, all completely legally.

However, that doesn’t mean that directors’ loans don’t have their place.  They can be useful for short-term needs, but they can get complicated and expensive if they aren’t managed carefully.  Always make sure you keep meticulous records relating to Director’s Loan Accounts.

Getting your remuneration strategy right is key to being tax-efficient and compliant.  If you’re a director and unsure about the best way to take money from your company, please feel free to email me to book a consultation.  We can review your specific situation and ensure your bookkeeping is watertight.

During October’s Facebook Live, I demystified the financial obligations and costs of becoming an employer for the first time, providing a clear checklist of actions.  I covered the essential financial steps, including registering as an employer with HMRC, understanding PAYE, calculating Employer’s National Insurance contributions, auto-enrolment pension obligations, and the costs to factor into your budget beyond just salary.

Are you thinking of hiring in the next 6 months? 

It’s A Big Step!

Hiring your first employee and becoming an employer is a very big step for a business.  It is a sign that your business is growing and becoming a success, but it also comes with serious legal and financial responsibilities.  This blog will break down the financial side into manageable steps.

Step 1: The Hidden Costs – Budgeting Beyond Salary

The “true cost” of an employee is not just their wage.  You need to budget for Employer’s National Insurance Contributions and Employer’s Pension Contributions.  You also need to budget for potential costs such as recruitment fees, equipment, software licenses, and insurance (Employer’s Liability is a legal requirement).

Employer’s Liability Insurance is a policy that covers you if an employee becomes ill or is injured as a result of working for you.  You can read more about Employer’s Liability Insurance on the Government website.

For those who have hired staff, what was the one cost that surprised you the most?

Step 2: Registering as an Employer

You must register with HMRC before your first payday. You can do this online, and once registered, you will receive your employer’s PAYE reference number, which will be sent to you in a letter. 

To start the process of registering, go to the Government website and follow the instructions on the screen.

You need to make sure you register in plenty of time so you have the necessary information before you pay your employees for the first time, but you cannot register more than 2 months before you start paying employees.

What’s your biggest worry about becoming an employer?

Step 3: Understanding PAYE (Pay As You Earn)

PAYE, or Pay As You Earn, is HMRC’s system for collecting income tax and National Insurance from employment.  You, as the employer, are responsible for calculating and deducting these from your employee’s pay and paying them to HMRC.

Income Tax is a tax that is deducted from your income once you have exceeded your personal allowance.  The personal allowance is currently £12,570.  The amount of income tax you pay depends on your wage.  The employer pays this amount to HMRC on your behalf.

The current income tax rates are as follows:
Personal Allowance – up to £12,570 – 0%
Basic Rate – from £12,571 to £50,270 – 20%
Higher Rate – £50,271 to £125,140 – 40%
Additional rate – over £125,140 – 45%

National Insurance is another tax that funds specific state benefits and the State Pension.  Two types of National Insurance Contributions affect employees.  Employee’s National Insurance, which is also referred to as Class 1 Contributions.  It is deducted from your income and paid to HMRC by your employer on your behalf.  The amount you pay for Class 1 NI depends on your age, if you are under the State Pension Age, and are earning more than £242 a week from one job. If you earn between £125 and £242 a week, you don’t usually pay Class 1 NI, but you may still earn an NI credit.  If an employee earns less than £125 a week from one job, they can choose to pay voluntary Class 3 Contributions.  For the 2025/2026 tax year, if you earn between £242 and £967 a week (£1048 to £4189 a month), your NI rate is 8%.  If you earn over £967 a week (£4189 a month), your NI rate is 2%. 

Employer’s National Insurance is paid by the employer, on top of the employee’s salary.  The rates for the 2025/2026 year, for most employees, will be 15% on wages from £96 to £481 a week (£417 to £2083 a month), 15% on wages from £481.01 to £967 a week (£2083.01 to £4189 a month), and 15% on wages over £967 a week (£4189 a month).

Employers will also need to pay Class 1A and 1B National Insurance on any expenses and benefits they give to their employees.  The current rate for this is 15%.

You can read up more about the National Insurance Rates by going to the HMRC website. 

The good thing is that there is a lot of different payroll software out there that will do all these calculations for you.  You do need to ensure that whatever software you choose to use, it is recognised by HMRC as RTI Compliant Software.  RTI stands for Real Time Information.

Cloud accounting software usually has payroll built in, though you may have to pay an additional fee for that function.  QuickBooks Online has two different payroll subscriptions to choose from.  Xero, Sage Online, and FreeAgent all have the ability to deal with payroll.  There are also different software options available that only deal with payroll.  If you are using software that is only for payroll, you will need to import that information into your accounts software to ensure that your accounts are correct.

Step 4: Workplace Pensions (Auto-Enrolment)

In October 2012, new legislation came into play that stated employers who had more than 250 employees must automatically enrol eligible employees into a workplace pension scheme.  It was gradually rolled out over a number of years, until all employers had to follow the new legislation from February 2018.

An employee is eligible for auto-enrollment if they are classed as a worker (anyone who works under a contract of employment), between 22 years old and the State Pension age, and earn at least £10,000 a year.  However, if you are a sole director limited company, and there is no other employee, you do not need to follow auto-enrollment.

You can check whether you need to follow auto-enrollment by visiting the Pension Regulator’s website. There is a lot of information on their website about what your responsibilities are in regards to pensions.  If you are a new employer, you can visit a specific page on their website that allows you to answer some questions, and it will give you a tailored duties timeline about what you need to do and by when. 

The current contribution rates are as follows:

• Employer’s Contribution must pay a minimum of 3%
• Employee’s Contribution must pay a minimum of 5%

The total minimum contribution that must be paid towards an employee’s pension is 8% of an employee’s qualifying earnings.  For the 2025/2026 tax year, the qualifying earnings fall between £6,240 and £50,720.

Contributions towards an employee must be made from their first day of employment.  As long as the employee’s wage is over £10,000, they will be automatically enrolled in the pension scheme.   However, an employee can opt out of their workplace pension scheme as long as they do this during the first month they are employed.   As long as they opt out in the first month, any contributions that they have paid will be refunded to them.  They can still opt out at any time, but they won’t get their contributions back until they retire. To opt out, the employee needs to ask their pension provider for an opt-out notice, which should be included in their welcome pack.  They need to complete the form and give it to their employer.

Hiring your first employee is a huge milestone.  Getting the payroll and pensions right from day one is critical.  If you are planning to grow your team, let’s talk.  I can help you with getting your payroll all set up and ensure you’re compliant from the start.  Please feel free to email me.

During September’s Facebook Live, I provided a proactive session focused on moving beyond historical bookkeeping. I covered how to create a simple but effective budget for the upcoming tax year, the basics of cash flow forecasting to anticipate future shortfalls, and how to use these financial tools to make strategic business decisions, set realistic goals, and secure potential funding.  My objective was to empower business owners to move forward from reactive bookkeeping to proactive financial planning, using budgets and forecasts to set goals and control their financial future.

Beyond Just Recording History

When you are completing your accounts, you are looking at transactions that have already occurred and just recording that information.  When you budget and use cash flow forecasting, you are looking into the future and planning for how to make things happen.  It is the difference between looking in the rear-view mirror and looking at the sat-nav to see where you are going.

What is a Budget?

Budgeting looks at the financial direction of where a business owner wants to take their business.  It provides a financial roadmap for what a business wants to achieve for a particular period of time.

When you create a budget, you are creating a detailed plan of your expected income and expenses over a period of time (for example, the next 12 months).  It will include an estimate of income and expenses, expected cash flow, and expected debt reduction.  A business will typically re-evaluate its budget regularly.  A budget will give you a baseline which you can then compare actual results to in order to determine how they vary from the expected performance.  It can provide you with valuable insight into how your business is actually doing in terms of the cost of running the business, and you will be able to improve the day-to-day running of the business, as well as be prepared for any potential problems.

How do I create a Simple Budget?

Depending on the accounts software you are using, you may be able to create your budget by pulling the historical data through and pre-populating the budget based on that information.  However, you can create a very simple budget using spreadsheets.  There are many free templates online that can be used to get you started.  You will set up different sections on the spreadsheet to cover Income, Fixed Costs, Variable Costs, and One-Time Costs.  Each type of income/expense will be entered on its own row, with the figures going across the spreadsheet in the columns.

If you have been in business for a period of time, the best thing to do is to start with your historical data, so the previous year’s profit and loss statement.  It will give you a starting point for what figures to use.

The first thing you want to look at is your income.  Break it down into the different income streams you have – for example, different products, or different sales avenues (website, bricks and mortar shop, Amazon, Etsy), or different locations.  Estimate what your revenue will look like going forward, taking into consideration any seasonal changes, any recurring income that comes in from clients, and any future projects that you have planned.

The next thing to look at is the costs associated with running your business.  Some of these costs will be fixed – for example, rent, insurance, software fees, payroll-related expenses (National Insurance, wages) – any expense where the amount paid is the same for the time period you are looking at.  Variable costs will be things like stock, travel expenses, marketing costs, utilities – any expenses that fluctuate in both amount and how often they occur.

The last set of costs you want to look at are the ones that are considered a one-off or unexpected.  You would include things like purchasing equipment, moving office, legal fees, and equipment repairs. These are expenses that you have a contingency for, but may not necessarily happen.

When you enter figures into your budget, look at the historical data, but also think about the plans you have for the business.  For example, are you planning a big marketing campaign? If so, adjust the figure for marketing costs within the budget to see how it impacts your profit.  If you have seasonal changes, ensure that the figures for those months reflect that increase in sales or expenses. 

You want to ensure that you are setting realistic targets for your sales – be conservative with the figures you are hoping to achieve.  Remember, this is a budget, and not what will actually happen.  It is just a tool to help you identify where you perhaps need to cut spending, or increase it, for certain items to help you achieve your goals.

What is Cash Flow Forecasting?

To put it simply, cash flow is the movement of money in and out of a business over a specific period.  The profit of a business is not the same as the amount of money that you have in your bank account.  If you have a positive cash flow, that means more money is coming into the business than is going out and indicates that a business is healthy.  If you have a negative cash flow, you need to look at the spending patterns for the business and work out either how to increase the money coming into the business from sales or where you can cut back on the spending.  Understanding the cash flow of your business is crucial, as even a business that is profitable can still fail if it doesn’t have enough money in the bank to cover expenses.

The purpose of a cash flow forecast is to help a business owner predict any future cash shortfalls so that they can act before they happen.  It can also help to predict any future cash surpluses and allow you to plan for how to invest those funds or use them to grow your business.

To create a simple cash flow forecast, the first thing to do is to choose your planning period.  This could be weekly, monthly, or quarterly.  Plan as far ahead as you can based on your cash flow cycle and try to ensure your figures are as accurate as possible.

For each of the weeks or months in your time period, you will need the following information:

• The opening balances on your various bank accounts (main bank, PayPal, cash)
• The amount of sales you will have coming in (if some of the income isn’t regular, you can try to predict what it will be by looking at the figures from the previous year, if applicable) – ensure that you are putting the figures into the correct time period based on when the payments will clear in your bank account
• any money you receive from tax refunds, loans, interest, or grants
• a list of your expenses (rent, wages, stock, bank fees, loan repayments, utilities, advertising, tax bills)

After you have the information to hand, you can then create a cash flow forecast in a spreadsheet.  Enter the time period across the top of the spreadsheet, with each week/month being in its own column.  In the first column of the spreadsheet, put the names for each of your bank accounts in a row of its own, and then below that list each type of income and expense in its own row.

At the end of the section where you have your income, add in a new row and label it “Net Income”.  The figures in this row will be the total of all your income for that time period.  At the end of the section where you have your expenses, add in a new row and label it “Net Expenses”.  The figures in this row will be the total of your expenses for that time period.  For the final row, you want to have this figure be the “Opening balances”, plus the “Net Income”, minus the “Net Expenses”.  That figure will tell you whether you have a positive cash flow (you have more money coming into the business than you are spending) or a negative cash flow (you are spending more money than you have coming into the business). 

For each week/month, you want to enter the figures for the different income and expenses in the appropriate row and column. You will need to ensure that the “opening balances” for each of your bank accounts are updated for the beginning of each time period, as they will change.  The figures you enter into the cash flow forecast can be updated as and when they are needed.

You can find templates online to use for creating cash flow forecasts using spreadsheets, and depending on the accounts software you use, it might be able to create a forecast for you based on the information you have already entered into the accounts.

How do I use a budget and cash flow forecast for my business?

Once you have your budget and cash flow forecast set up, you can use the information to help you plan for the future. 

They can help you to set goals for your business – for example, you may want to start taking on staff, so by using the budget and your cash flow forecast, you will be able to determine when you will be able to afford to hire staff.  These reports are also helpful in determining whether a marketing campaign or a particular product has increased your sales.

If you are trying to secure funding for your business, a lot of banks and investors will ask for a cash flow forecast.  They want to be able to see whether you will be able to afford the repayments and whether making an investment in your business is a good idea.

Another way these two tools are useful is that they allow you to compare your actual monthly results with your budget, so you can see where there were differences and then work out why.  It can help to highlight if a particular product or service is no longer what your clients are looking for.

This month is the perfect time to plan.  If you’d like help setting up a budget or a forecast for your business, please feel free to email me.

During July’s Facebook Live, I discussed online business bank accounts and their savings spaces – what they are and how to manage them.

Managing “Pots/Spaces” in Online-Only Business Bank Accounts

Many business owners are now using online-only business bank accounts like Monzo and Starling. A key feature of these accounts is the ability to create “pots” or “spaces”—virtual envelopes within your main account to help you set money aside for specific purposes. These pots/spaces aren’t separate bank accounts; they’re part of your main account and allow easy transfers in and out at any time.

Common Confusion Around Pots/Spaces and Accounting

There’s often confusion among business owners and even some accounting software providers about how to handle transactions involving pots/spaces.

Most online accounting software supports Bank Feeds, where transactions are automatically imported from your bank account. If you have multiple bank accounts (e.g. current, savings), each one typically needs a separate connection.

However, pots/spaces in Monzo and Starling don’t have separate account numbers. They sit under a single main account. When setting up the bank feed, you may be given the option to include or exclude transactions involving pots/spaces.

Bank Statements and Pots/Spaces

Your bank may or may not provide individual statements for each pot/space. Even without formal statements, you can still view pot/space activity within your online banking dashboard. Regardless, you must record all transactions related to pots/spaces in your accounts. This ensures accurate tracking of funds—even though the money hasn’t left the business, it’s simply been allocated for a purpose.  It gives you a clear picture of what money you have in the business, and where it is.

A Simple Analogy

Think of a pot like a piggy bank.

You receive £20 and put £5 in your piggy bank and £15 in your wallet. You still have £20 total—it’s just separated for a reason. In traditional banking, you’d need a second account (like a savings account) to do this. Pots/spaces let you do the same, but within one account.

How to Record Pots/Spaces in Accounting Software

The easiest approach is to use sub-accounts:

• Create a parent account, such as “Bank Reconciliation.”
• Under it, set up sub-accounts like:
  • Bank Account 1234 (your main bank account)
  • Bank Account Pots/Spaces (to represent all pots)

Some prefer to create a sub-account for each pot/space, but if you frequently rename or close pots, using a single “pots/space” sub-account is simpler.

Recording Pot/Spaces Transactions

• If pot/space transactions appear in your bank feed, categorise them as transfers to or from the “Bank Account Pots/Spaces” sub-account.
• If they don’t appear, enter them manually based on your bank statement or transaction history.

Recording these movements ensures you can later show where money came from when it’s moved back into the main account—it’s not income, just an internal transfer.

Reconciling Your Bank Account

At month-end, reconcile the parent account (“Bank Reconciliation”). This will combine the main account and pot/space sub-accounts, giving you a full picture of your bank balance.

Note: This method works well in QuickBooks Online. If you use different software, check with your provider, bookkeeper, or accountant to make sure you’re capturing pot activity correctly.

If you have any questions about how to deal with the unique system for saving funds used by some online bank accounts, please feel free to email me.