How to Start a UK Business in 2025 – A Step-by-Step Guide

Starting a business in the UK is more accessible than ever, but the process involves several important steps that can significantly affect your tax, legal obligations, and overall success. This guide outlines the key actions you need to take to structure and run your business correctly from day one.

Choose the Right Legal Structure

The first decision is whether to operate as a sole trader or a limited company.

Sole Trader	Limited Company
Easiest and cheapest to set up	Register with Companies House (£50–£150 depending on service)
Register as self-employed with HMRC by 5 October following the tax year you start trading	Offers limited liability (your personal assets are protected)
Pay Income Tax and Class 4 National Insurance on profits	Must file annual accounts with Companies House and submit a Corporation Tax Return (CT600) to HMRC
Personally liable for all business debts	Typically more tax-efficient at higher profit levels
Higher tax rates apply if profits exceed £50,000	Requires more administration and compliance

Open a Business Bank Account

While not legally required for sole traders, a dedicated business bank account is strongly recommended. For limited companies, it is mandatory due to the separate legal status of the business.

Digital banks such as Tide, Starling, and Mettle offer quick setup options. For international transactions, consider banks like Wise or traditional high-street providers.

Set Up a Bookkeeping System

Bookkeeping is essential for tracking income, expenses, and cash flow.

Options include:

• Spreadsheets – basic but effective for small operations
• Software – tools like Xero, QuickBooks, or FreeAgent automate transaction tracking and VAT reporting

If turnover exceeds £90,000 or will soon, use Making Tax Digital-compliant software to meet HMRC requirements.

Monitor Turnover for VAT

You must register for VAT if your business turnover exceeds £90,000 in any rolling 12-month period.

VAT schemes:

• Flat Rate Scheme – simpler for small businesses, but no VAT reclaimed on purchases
• Standard Scheme – allows VAT reclaims, but more detailed accounting required

Registration is mandatory within 30 days of crossing the threshold.

Set Money Aside for Tax

Always budget for tax. Suggested set-asides:

• Sole Traders – 25–30% of net profit for Income Tax and NI
• Limited Companies – 19% Corporation Tax up to £50k profits, 25% over £250k
• VAT Registered – 20% of income or the calculated VAT amount from sales

Pay Yourself Correctly

Sole Trader	Limited Company
Withdraw funds as drawings (not considered wages)	Most directors take a low salary (e.g. £12,570) and the remainder as dividends
No payroll required, but keep records for tax reporting	Dividends are taxed at 8.75% (basic rate)

Register for PAYE (If Employing Staff or Taking a Salary)

If you employ others or pay yourself through payroll, register as an employer with HMRC. You’ll be given PAYE references and must file Real Time Information (RTI) and potentially set up a pension scheme for eligible staff.

Track and Claim Business Expenses

Claiming allowable expenses reduces your taxable profit. Common expenses include:

• Home office costs
• Equipment and software
• Travel for business purposes
• Salaries
• Subscriptions and utilities

Ensure all claims are reasonable and well-documented.

Invoice and Get Paid Promptly

Effective invoicing ensures cash flow. Recommendations:

• Send invoices promptly
• Use clear payment terms (e.g. 14 days)
• Include accurate bank details or online payment links
• Consider upfront deposits for services

Forecast Cash Flow

A simple cash flow forecast helps avoid shortfalls. List expected income and expenses over 3–6 months and update monthly. This helps with planning and decision-making, especially when managing tax liabilities.

Build an Emergency Fund

Set aside at least one month of essential business costs. Start small and build gradually—e.g. by reserving a portion of each invoice. This helps absorb unexpected costs like delayed payments or equipment failures.

Ignore R&D Tax Credits Unless Applicable

R&D tax relief is only available to limited companies undertaking eligible innovation. Most microbusinesses and service providers do not qualify. Focus instead on maximising regular allowable expenses and maintaining profitability.

Review Pricing and Profit Margins Regularly

Reassess pricing every 6–12 months to account for increased costs and demand. Avoid undercharging by ensuring all business costs, time, and tax liabilities are factored into your rates.

Stay Updated on HMRC Thresholds

Each April, check updates to:

• Personal Allowance
• Income Tax bands
• National Insurance thresholds
• VAT registration threshold
• Annual Investment Allowance

Keeping up to date helps with compliance and tax efficiency.

Running a small business in the UK is achievable with the right setup and regular financial oversight. Start with a solid structure, use simple tools for record-keeping, and maintain financial discipline. This will help you stay compliant, profitable, and prepared for growth.

Need help getting started? Contact Helpbox today – we’re here to support you from setup to success.