When starting a baking business from home in the UK it’s important to think about how you’re going to organise the business side of things.
Although you don’t have to do this first, it is useful to decide how your business will be run or structured so that you can organize finances, record income and expenses accordingly which will save you time down the line. HMRC advise notifying them as soon as you become self-employed, though you will have until the 5th October after the end of the first tax year (i.e in your second tax year) during which you became self-employed in order to register. Once you register you’ll be able to submit self-assessment tax returns each year or instruct an accountant to do it for you on your behalf. Some people may opt for a full accountancy package such as those offered by Crunch.co.uk or The Accountancy Partnership, giving them full focus on baking, whilst others may use software to do their own accounts like Quickbooks and Xero or even just a spreadsheet to send over to a local accountant. Many modern UK banking and fintech apps are providing tools for small businesses to better manage their accounts like Tide and Starling.
You’ll also need to decide whether you’ll be operating as a sole trader or a Ltd company.
Becoming a Sole-Trader
As a baking sole-trader your personal and business finances are kept together, though it will be your responsibility to keep note of which transactions are business expenses and income. This is where its helpful to have a separate business bank account such as Tide’s business account for sole traders. Becoming a sole-trader is the simplest option for your home-baking business as you’ll only have to complete one self-assessment tax return each year for yourself to declare your income, and claim any allowable expenses.
You need to register as self-employed by the 5th October of your second trading year. If you fail to do so by this deadline you could receive a penalty, so you should aim to register as self-employed at your earliest opportunity.
There is also less admin work involved and admin costs. Below is a summary of the main advantages and disadvantages of operating as a sole trader when starting a UK home baking business:
- Simpler setup
- Less paperwork
- Cheaper accountancy costs
- Greater privacy (your name wont appear on a public register of directors at companies house)
- Personal liability (you are personally liable for costs as you and the business are indistinguishable, therefore you will incur any loss the business makes)
- Ltd companies can be more profitable and tax-efficient over a certain amount of earnings
Forming a Ltd Company
Forming Ltd (limited by shares) company makes a separation between you and your business. The business is a separate entity and therefore all finances are separate and personal liability is decreased although directors still have duties.
Some of the responsiblities of being a company director as follows:
Filing Confirmation Statements to Companies House, Annual Accounts to HMRC and self-assessment’s as a director of a company. You can pay yourself through dividends, with a Director’s salary or a combination of both. Again Crunch have some great advice and articles on the steps involved, duties, liabilities and responsibilities to HMRC and Companies House if you decide to operate as a Ltd Company.
Check out this article:
You can always incorporate your business as a ltd company at a later date.
Whether you decide on a sole-trader or a ltd company its important to understand your legal obligations and duties in both. Do check out some of the links, gov sites or speak to an accountant if you’re still unsure.
You may already be registered as self-employed if you’re already running your own business, whether food or in other industries. Feel free to introduce yourself by email or in the comments. I’d love to know what you do and why you’d like to start a baking business.
Other Useful links:
Registering as self-employed is the first step in the Food Standard’s Agency’s guide to starting a food business at home.