TL;DR — Key Takeaways
- Open a dedicated business bank account before anything else — never mix personal and business finances.
- Register with HMRC as self-employed (sole trader) or incorporate your limited company within 3 months of starting.
- Set up accounting software early — it's far easier than catching up later.
- Keep all receipts and records for at least 5 years (sole traders) or 6 years (limited companies).
Before You Start: What You'll Need
Setting up your business accounts properly takes less than a day if you approach it systematically. Before you begin, gather the following:
Your National Insurance number
Required for HMRC registration and Self Assessment
Government Gateway login
Your HMRC online account — create one at gov.uk if you don't have one
Business bank account details
You'll need this before setting up accounting software
Your business start date
HMRC needs to know when you started trading
Company registration number (if Ltd)
From Companies House — needed for your accounts
UTR number (if sole trader)
Unique Taxpayer Reference — issued by HMRC when you register
The 8-Step Setup Process
Register Your Business with HMRC
Your first obligation is to tell HMRC you're in business. The process differs depending on your business structure:
| Structure | How to Register | Deadline |
|---|---|---|
| Sole trader | Register for Self Assessment at gov.uk | By 5 Oct in your second year of trading |
| Partnership | Register the partnership and each partner for Self Assessment | By 5 Oct in your second year |
| Limited company | Incorporate at Companies House (£50 online) | Before you start trading |
Late registration penalties: HMRC can charge up to 100% of the tax due as a penalty for late registration. Don't delay.
Open a Dedicated Business Bank Account
This is non-negotiable. Mixing business and personal finances creates a bookkeeping nightmare, makes it impossible to track profitability, and raises red flags with HMRC. Open a separate account before you make your first business transaction.
For sole traders, a dedicated personal account used only for business is technically acceptable, but a proper business account is strongly recommended. For limited companies, a business account in the company's name is legally required.
Free tip: Open a NatWest or RBS business account and get FreeAgent accounting software completely free — saving £150+/year.
Register for VAT (If Applicable)
You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period. You can also register voluntarily below this threshold — which can be beneficial if your customers are VAT-registered businesses (they can reclaim the VAT you charge).
| VAT Threshold | Action Required |
|---|---|
| Turnover exceeds £90,000 (rolling 12 months) | Must register — within 30 days of exceeding the threshold |
| Turnover below £90,000 | Can register voluntarily — often beneficial for B2B businesses |
| Turnover below £90,000 but expect to exceed soon | Register in advance to avoid penalties |
Choose and Set Up Accounting Software
Once your bank account is open, set up your accounting software and connect it via bank feed. This is the most impactful thing you can do — it means every transaction is automatically imported and categorised from day one.
During setup, you'll be asked to enter your business details, accounting method (cash or accrual), VAT status, and opening balances. If you're starting fresh, opening balances are zero. If you're migrating from another system, you'll need to enter your current balances.
Most platforms offer a guided setup wizard that takes 30 - 60 minutes. QuickBooks and Xero both have excellent onboarding flows for new businesses.
Set Up Your Chart of Accounts
Your chart of accounts is the list of categories used to classify every transaction. Most accounting software comes with a pre-built chart of accounts suitable for UK small businesses. Review it and add any categories specific to your industry. For example, a construction business might add CIS deductions; a retailer might add separate stock categories. Don't over-complicate it — start simple and add categories as needed.
Connect Your Bank Feed
Bank feeds automatically import your transactions from your bank account into your accounting software — usually within 24 hours of them occurring. This eliminates manual data entry and ensures your records are always up to date. Most major UK banks (Barclays, HSBC, Lloyds, NatWest, Santander, Starling, Monzo) support bank feeds with all major accounting platforms.
Create Invoice Templates
Set up your invoice template with your business name, address, logo, payment terms, and bank details. UK invoices must include specific information by law:
Establish a Monthly Bookkeeping Routine
The biggest mistake new business owners make is letting their bookkeeping pile up. Set aside time each month — ideally the first week of the following month — to:
- Review and categorise all imported bank transactions
- Reconcile your bank account (match software to bank statement)
- Chase any outstanding invoices
- File receipts for all expenses
- Review your P&L to check profitability
- Set aside money for your tax bill (25 - 30% of profit is a good rule of thumb)
Common Setup Mistakes to Avoid
❌ Waiting until year-end to set up your accounts
Fix: Set up from day one — catching up on a year's worth of transactions is painful and error-prone.
❌ Using your personal bank account for business
Fix: Open a business account immediately. It's free with most challenger banks (Starling, Monzo Business, Tide).
❌ Not registering with HMRC on time
Fix: Register as soon as you start trading. The 5 October deadline in your second year is often missed.
❌ Choosing software your accountant doesn't use
Fix: Ask your accountant first. Working in the same platform saves time and reduces accountancy fees.
❌ Ignoring VAT until you've already exceeded the threshold
Fix: Monitor your rolling 12-month turnover monthly. Late VAT registration penalties can be significant.