Five bookkeeping mistakes new limited companies make in year one

Setting up a limited company is the easy part. A few clicks on Companies House and you're a director. The tricky bit is that the company is now a separate legal "person", with its own money, its own deadlines and its own rules, and most of what you knew from being a sole trader or employee no longer quite applies.

None of the mistakes below are signs of a bad business. They're just the ones I see most often from directors in their first year. Every one of them is easy to avoid once you know it's there.

1. Mixing your money with the company's money

The company's money isn't your money, even if you own all the shares. Paying for the weekly shop on the company card, or paying business costs from your personal account and "sorting it out later", makes the books messy and the tax picture worse.

Anything you take out that isn't salary, dividends or a genuine expense repayment goes on your director's loan account. If you owe the company money at the end of the year and don't repay it within 9 months, the company can have to pay extra Corporation Tax of 33.75% of what's outstanding. You get it back once the loan is repaid, but it's cash tied up for nothing.

The fix: a separate business bank account from day one, and keep personal spending off it.

2. Paying yourself like a sole trader

Sole traders take "drawings" whenever they like. Directors can't. Money normally comes out of a limited company as:

• salary, which means the company running payroll and registering as an employer

• dividends, which can only be paid from available profits (this year's and any kept from earlier years), with a directors' meeting, minutes and a dividend voucher each time

• director's loans, which (see above) need tracking

Dividends paid when there isn't enough profit to cover them are a common year-one slip, and they're harder to undo than to avoid.

The fix: agree how you'll pay yourself before you start, and check profits before declaring a dividend.

3. Getting caught out by first-year deadlines

Year one has its own odd dates, and they're easy to mix up:

• First accounts to Companies House: 21 months after the company was registered (after that, 9 months after each year end)

• Corporation Tax payment: 9 months and 1 day after the end of the accounting period

• Company Tax Return to HMRC: 12 months after the end of the accounting period

• Confirmation Statement: at least once every 12 months, so a check that the company's details at Companies House are correct

Your first financial year can also be longer than 12 months, which can mean two Company Tax Returns for that first stretch.

Late accounts aren't cheap. Companies House penalties for a private company start at £150 and rise to £1,500 if accounts are more than 6 months late, and they double if you're late two years running.

The fix: put every date in your diary the week you incorporate, or get your bookkeeper to track them for you.

4. Not watching the VAT threshold

You must register for VAT if your taxable turnover goes over £90,000 in any rolling 12 months, not just your financial year. Once you cross it, you have 30 days from the end of that month to register.

Growing businesses are the ones most likely to miss this. A strong few months can push you over before you've noticed, and late registration can mean paying VAT you never charged your customers.

The fix: check your rolling 12-month turnover every month once you're past about £70,000.

5. Leaving the bookkeeping until year end

The classic: twelve months of bank transactions, a carrier bag of receipts and a looming deadline. It's stressful, it's more expensive (your accountant charges for the untangling), and it means you've spent the whole year without knowing whether the business is actually making money.

The fix: a monthly check-in. Reconcile the bank, file the receipts (see last month's post on which receipts to keep) and look at the numbers. It's an hour a month, not a week in January.

The takeaway

Year one is when good habits are easiest to set and bad ones are cheapest to fix. Separate bank account, a plan for paying yourself, every deadline in the diary, an eye on the VAT threshold and monthly bookkeeping cover almost everything.

If you've just incorporated, or you're partway through year one and want a second pair of eyes, get in touch.

This is general guidance based on GOV.UK and HMRC rules at the time of writing. Your own circumstances may differ, so check with your bookkeeper or accountant if you're unsure.