Launching a new business in the UK requires careful planning and an understanding of the required procedures. A structured approach helps build a solid foundation for your venture. Following this process ensures you meet all legal and financial requirements from the outset.
Develop Your Business Idea and Plan
Before taking official steps, your business idea must be developed and validated. This begins with market research to identify a target audience and understand their needs. Analysing competitors reveals market gaps and helps define your unique selling point.
Once the idea is refined, create a business plan to serve as a roadmap. It should begin with a mission statement defining the business’s purpose and goals. The plan must also include a detailed description of your unique product or service.
Realistic financial projections are a significant part of the business plan, detailing expected income and expenditure. These forecasts are necessary for internal planning and for seeking funding from banks or investors. The plan must also include a marketing and sales strategy to reach your target customers.
A business plan provides strategic clarity, forcing you to consider all aspects of the venture. It creates a framework to spot potential problems and set measurable goals. This helps you track progress once the business is operational.
Choose a Legal Structure
Deciding on a legal structure is a key step that affects your tax, personal liability, and administrative requirements. The three most common structures for new UK businesses are sole trader, limited company, and partnership. The right choice depends on your specific circumstances and ambitions.
The sole trader structure is the simplest choice for individuals starting out. As a sole trader, there is no legal distinction between you and your enterprise, meaning you have unlimited liability for business debts. This structure has a low administrative burden, requiring you to keep records and pay tax via Self Assessment.
A limited company is a separate legal entity from its owners, providing them with limited liability. This protects personal assets if the company accrues debt. Limited companies pay Corporation Tax on their profits and have more administrative requirements, including registration with Companies House and filing annual accounts.
A partnership involves two or more people who share responsibility for the business. Like sole traders, partners have unlimited liability for business debts. Each partner pays tax on their share of the profits through Self Assessment. A partnership agreement is highly recommended to outline how profits, liabilities, and decisions will be shared.
Register Your Business
After choosing a legal structure, you must officially register your business. The process differs for sole traders and limited companies. Registration involves notifying the relevant government bodies to ensure your business is legally recognised and compliant.
Sole traders register for Self Assessment with HM Revenue and Customs (HMRC). You must register if you earn more than £1,000 from self-employment in a tax year. This is done online via the GOV.UK website, and the deadline is 5 October in your business’s second tax year. HMRC will then send you a Unique Taxpayer Reference (UTR) for your tax returns.
Registering a limited company is handled by Companies House and requires several key details. You will need to provide:
- A unique company name
- A registered office address in the UK
- At least one director and one shareholder
- A ‘statement of capital’ outlining the shares and their value
Registration can be completed online for a fee of £50 or by post for £71.
After incorporation, you will receive a Certificate of Incorporation from Companies House. You must then register for Corporation Tax with HMRC within three months of starting to trade. HMRC will issue your company its own Unique Taxpayer Reference (UTR) for its tax obligations.
Set Up Your Business Finances
Once registered, you must establish a financial framework, starting with a dedicated business bank account. Separating business and personal finances is good practice and a legal requirement for limited companies. A business account simplifies record-keeping and tracking income and expenditure for tax purposes.
Many UK banks offer accounts for start-ups with features like initial fee-free periods and accounting software integration. When applying, you will need to provide proof of identity and address. If you have a limited company, you will also need your company registration details.
Securing funding is another consideration. The government-backed Start Up Loan offers unsecured personal loans from £500 to £25,000 at a fixed 6% interest rate for businesses trading for less than 36 months. Government grants are another avenue, often awarded to businesses in specific sectors or regions.
Start-ups may also seek equity finance, selling a share of the business for investment. The SEIS and EIS schemes encourage this by offering tax incentives to investors. Regardless of funding, implement a bookkeeping system from the start using software or an accountant to ensure records are accurate.
Understand Your Tax and National Insurance Obligations
You must understand your ongoing tax and National Insurance responsibilities, which depend on your legal structure. Failing to meet these requirements can result in penalties, so it is necessary to know what to pay and when.
Sole traders pay income tax and National Insurance through the Self Assessment system. You must file an annual tax return detailing your income and allowable expenses. The online submission and payment deadline is 31 January, with income tax based on your total profits.
Limited companies pay Corporation Tax on all profits. The main rate is 25% for profits over £250,000, with a 19% rate for profits under £50,000. Companies file a Company Tax Return and pay any tax due nine months and one day after their accounting period ends. Directors must also file a personal Self Assessment return for any salary or dividends.
You must register for Value Added Tax (VAT) if your business’s taxable turnover exceeds £90,000 in a 12-month period. Once registered, you must charge VAT to customers and submit regular returns to HMRC. Businesses below this threshold can register voluntarily to reclaim VAT on their purchases.
Self-employed individuals pay National Insurance contributions (NICs) to qualify for state benefits. As of April 2024, mandatory Class 2 contributions are abolished, but voluntary contributions can be made to protect your NI record. Class 4 NICs are paid as a percentage of your annual profits through your Self Assessment return.
Get the Right Insurance and Licences
Managing risk involves securing the right insurance and obtaining necessary licences to operate legally. These measures protect your business, employees, and the public from potential harm or financial loss.
Public Liability insurance covers compensation claims from the public for injury or property damage caused by your business. While not always legally required, it is recommended for any business that interacts with the public. Many clients will require this cover before working with you.
Professional Indemnity insurance protects you against claims from clients who suffer financial loss due to negligent advice or errors. For professions like accounting or architecture, this insurance is often a mandatory requirement of their professional body.
Employers’ Liability insurance is a legal requirement in the UK as soon as you hire staff. It covers compensation claims from employees injured or made ill by their work. The law requires a minimum cover of £5 million, though most insurers offer £10 million as standard.
Some business activities require a specific licence from a local council or regulatory body. This includes activities like selling food, playing recorded music, or selling alcohol. The GOV.UK licence finder tool can help determine which permissions you need, and you should check with your local authority to ensure compliance.
Hiring Your First Employees
When your business grows enough to hire its first employee, you must be prepared to meet a new set of legal and administrative responsibilities as an employer. You must register as an employer with HMRC before your new employee’s first payday. This can be done online and is required even for part-time staff. HMRC will then provide you with a PAYE (Pay As You Earn) reference number to operate your payroll.
Operating a payroll system is a legal requirement. Through PAYE, you must deduct Income Tax and National Insurance from employee wages and pay it to HMRC. You must also provide a payslip each pay period and pay at least the National Minimum Wage.
Employers must automatically enrol eligible staff into a workplace pension scheme. This applies to employees aged between 22 and the State Pension age who earn over £10,000 per year. You must contribute a minimum of 3% of their qualifying earnings, while the employee contributes 5%.