Accounting for startups: a comprehensive guide for UK entrepreneurs

Why is accounting important for a startup?

Good accounting practices are essential for the survival and growth of any startup and can help:

• Ensure compliance with UK tax laws: Startups must meet HMRC regulations, including corporation tax, Pay as You Earn (PAYE), and VAT. Proper accounting for startups prevents errors that could result in fines or investigations.
• Provide clarity on a company’s financial health for better decision-making: By tracking expenses, revenue, and profit margins, startups can make data-driven decisions that improve efficiency and growth opportunities.
• Aid in securing funding or loans: Investors and lenders need accurate, up-to-date financial statements to assess a startup’s viability. Proper records enhance credibility, improving the chance of securing funding.
• Prevent cash flow problems, a common cause of startup failures: Mismanaged cash flow disrupts operations. Accounting ensures businesses maintain enough working capital to cover ongoing expenses.

Businesses that prioritise accounting early will likely benefit in the long term.

Accurate records help avoid future financial issues, simplify scaling processes, and reduce administrative burdens as the business grows. By maintaining a clear financial structure from day one, startups position themselves for long-term stability and success.

Does a startup need an accountant?

Hiring an accountant for a startup is a smart decision, offering benefits that outweigh the costs:

• Expertise in navigating tax laws and regulations: From corporation tax to VAT registration, UK tax rules are complex. Startups often overlook deductions and allowances, which a professional can identify.
• Time savings: Entrepreneurs wear many hats, but accounting is time-consuming and technical. An accountant handles financial tasks, freeing founders to focus on growth strategies.
• Strategic advice: An accountant provides insights into funding opportunities, cost control, and cash flow management, helping startups meet financial goals.
• Specific tax support: Startups must navigate many things, including national insurance contributions and quarterly VAT filings. An accountant can streamline these processes and prevent costly mistakes.

While cost is often a concern, hiring an accountant for a startup in the UK can be affordable. Pricing structures vary, with options such as monthly retainers, hourly billing, or project-based fees.

Startups with limited budgets can also explore using a part-time or freelance accountant who offers professional services without the full-time cost. 

By investing in professional help, a startup can experience reduced stress, improved compliance, and benefit from financial clarity that positions them for success.

Accounting basics every startup needs to know

These accounting basics can help ensure you understand the requirements for your firm.

Setting up a business account

A dedicated business account is critical for managing finances. It provides a clear separation between personal and business transactions, simplifies tax filings, and improves professional credibility when dealing with clients or investors. 

Many UK banks offer startup-specific business accounts with features such as free transfers and accounting integrations.

Choosing an appropriate accounting method

Startups must choose between cash accounting and accrual accounting. Cash accounting records income and expenses when payments are received or made, making it suitable for small businesses with straightforward cash flow. 

Accrual accounting records transactions when they occur, providing a clearer picture for growing businesses. Consulting an accountant can help a startup decide which method aligns best with their needs.

Tracking income and expenses

Effective expense tracking ensures businesses understand their spending patterns and can identify cost-saving opportunities. 

Tools such as QuickBooks, Xero, and FreshBooks automate income tracking, generate financial reports, and streamline expense categorisation. Maintaining real-time records also makes it easier when it comes to doing your tax returns.

Understanding VAT registration thresholds

Startups must register for VAT if their annual turnover exceeds £90,000. Early registration allows startups to reclaim VAT on expenses, but it also requires charging VAT on sales, which can impact cash flow and pricing.

Businesses below the threshold should monitor turnover closely to ensure timely registration.

Budgeting and cash flow management

A solid budget ensures startups allocate funds effectively. Cash flow management avoids financial shortfalls by tracking the timing of any income and expenses. 

Tools like Float and Pulse simplify cash flow forecasting and help startups anticipate challenges and plan accordingly.

Know the key UK tax deadlines

Meeting HMRC deadlines is non-negotiable for startups.

Here are some of the key tax deadlines: 

• Online self-assessment tax return: 31 January.
• Paper self-assessment tax return: 31 October.
• Corporation tax return: Within 12 months after the end of the accounting period.
• VAT returns: Filed quarterly.

You’ll also need to know when you must pay tax if you do a self-assessment tax return. This tends to be by 31 January after the end of the tax year they relate to. 

Marking these dates in calendars or accounting software ensures startups stay compliant and avoid penalties.

Top accounting tips for startups

Practical accounting tips for startups include:

• Keep personal and business finances separate: This helps to avoid confusion and simplify reporting, which can be helpful when doing tax returns.
• Invest in user-friendly accounting software: Platforms, including Xero and QuickBooks, automate tasks and generate accurate reports.
• Regularly reconcile your accounts: Check for errors and discrepancies by matching bank statements with accounting records.
• Set aside money for taxes: It’s recommended you save 20%–30% of income for tax liabilities to prevent shortfalls and ensure you can meet your tax bills.
• Automate as much as possible: Automate invoicing, expense tracking, and payroll processes to save time and reduce errors. There are many automation tools available, such as Xero, QuickBooks, and Float, that can help streamline processes and improve efficiency.
• Prepare for emergencies: It’s worth considering allocating an additional 10%–15% of your budget for unexpected costs.
• Seek professional advice: Consult a qualified accountant when scaling the business, planning fundraising, or when you’re facing complex transactions.

What to look for in an accountant for startups

Choosing the right accountant for your startup involves finding someone familiar with your business challenges. So, you should look for:

• An accountant with expertise in UK startup laws and regulations: This ensures compliance with HMRC requirements and the ability to identify tax-saving opportunities.
• An accountant familiar with funding and investment accounting: Experience managing investor funds or securing grants is invaluable.
• Transparency in fees and services: Having a clear understanding of upfront pricing and the services provided prevents unexpected costs. You could also ask how your fees may change as your business grows.
• Relevant qualifications: You should consider an accountant with credentials from either the Association of Chartered Certified Accountants (ACCA), the Chartered Institute of Management Accountants (CIMA), or the Institute of Chartered Accountants in England and Wales (ICAEW).

Platforms such as Unbiased simplify this search process by connecting startups with experienced accountants whose expertise is tailored to their needs.

When should a startup consider hiring an accountant?

Startups should seek professional help at critical moments, including during the initial business setup, when preparing for tax filings or VAT registration, before applying for funding or seeking investors and when scaling the business or expanding internationally.

Accountants can advise on company structure, registration, and compliance from the outset, handle filings accurately and identify eligible reliefs and allowances, as well as ensure high-quality financial statements to boost investor confidence and improve funding opportunities.

If you’re considering scaling your business, an accountant can provide insights into international regulations, reporting, and growth planning.

What are some tools and resources to simplify accounting for startups?

Here are some popular tools for accounting for startups:

• Xero, QuickBooks, and FreeAgent: These platforms offer automated bookkeeping, invoicing, and reporting tools. FreeAgent is free for those with a business account at either NatWest, Royal Bank of Scotland or Ulster Bank.
• Expense trackers: Tools like Expensify and Dext help startups manage receipts and categorise expenses efficiently.
• HMRC resources: HMRC’s website provides free guidelines on tax compliance, VAT registration, and deadlines.

Startups can combine paid software with free tools to streamline financial management without breaking the bank.

What are the costs of accounting for startups?

Hiring an accountant for a startup in the UK varies in cost:

• Professional accountants: A professional accountant will have average hourly rates that range from £35 to £100, depending on their experience and location.
• DIY accounting software: Affordable solutions such as Xero and QuickBooks can help startups manage basic tasks. Xero has plans that start at £16 a month for core features, with advanced tools available for £59 a month. QuickBooks has plans that start at around £30 per month for basic income and expense tracking, rising to over £100 per month for its most comprehensive package, including payroll and VAT management. Both platforms offer significant discounts regularly for a limited period.

While software is generally cheaper, professional accountants provide strategic insights and tax savings that’ll likely outweigh their costs. 

Startups with limited budgets can balance affordability and quality by outsourcing routine tasks while consulting accountants for complex needs. Investing in professional accounting early prevents costly mistakes and supports growth.

Get expert financial advice

By prioritising good accounting practices, startups can build a solid financial foundation and ensure compliance, clarity, and sustainable growth.

Whether you hire a professional accountant or leverage user-friendly software, managing finances effectively will save time, reduce stress, and position your business for success. 

Combining the right tools, professional advice, and proactive planning will give your startup the financial confidence to thrive in a competitive market.

Let Unbiased match you with a professional financial adviser or an accountant who understands how to help set up your business for long-term success.