Choosing an accountant or bookkeeping set-up for a new company

Do I Legally Need an Accountant?

For the vast majority of new private limited companies in the UK, there is no legal requirement to hire an accountant. Under the Companies Act 2006, small companies are exempt from the legal requirement for a statutory audit of their annual accounts. A company qualifies as small if it meets at least two of the following criteria in a financial year: turnover of no more than £10.2 million, a balance sheet total of no more than £5.1 million, and no more than 50 employees. As almost all new start-ups fall comfortably within these thresholds, an audit is not necessary, and therefore the primary legal driver for appointing a statutory auditor is removed. You are free to prepare and file your own accounts and tax returns.

Despite the lack of a legal mandate, it's crucial to understand that directors bear the ultimate legal responsibility for the company's financial and legal compliance. Section 386 of the Companies Act 2006 requires directors to keep adequate accounting records that show and explain the company's transactions. Hiring an accountant delegates the task of preparing accounts and returns, but it does not absolve the directors of their legal duty to ensure those filings are accurate and submitted on time. Should an accountant make an error resulting in a penalty from HMRC or Companies House, the liability ultimately rests with the company and its directors. This underscores the importance of choosing a competent professional, even though it is not a formal legal obligation.

Worth knowing: While not legally required for most new companies, an accountant can be essential for ensuring you meet your non-delegable directorial duties for accurate financial filing.

DIY vs. Bookkeeper vs. Accountant: Key Differences

The 'Do-It-Yourself' (DIY) approach involves the company director managing all financial administration. This includes daily record-keeping, invoicing, bank reconciliation, VAT returns, payroll, annual accounts, and the Corporation Tax return. This is a viable option only for the very simplest of businesses, typically a single-director company with a very low volume of transactions, no employees, and not registered for VAT. The main benefit is cost savings, but it requires a significant time investment to learn and correctly apply complex accounting and tax rules. The risk of making costly errors is high if you are not confident in these areas. You will still need to use MTD-compatible software for any digital filing requirements, such as VAT.

A bookkeeper focuses on recording the company's daily financial transactions accurately and consistently. Their typical duties include processing sales and purchase invoices, reconciling bank and credit card statements, and managing accounts payable and receivable. Many bookkeepers are also qualified to prepare and submit VAT returns in compliance with Making Tax Digital (MTD) rules. They provide the clean, organised data that is essential for producing year-end accounts. However, a bookkeeper is generally not qualified to provide strategic tax planning advice or to prepare and file the statutory annual accounts with Companies House or the Corporation Tax return (CT600) with HMRC. They are the 'how' of daily finances, not the 'why' of tax strategy.

A chartered or certified accountant handles the higher-level compliance and strategic financial work. They take the data organised by you or a bookkeeper to prepare and file the statutory year-end accounts and the Corporation Tax return. Critically, accountants provide tax planning advice to ensure your company operates efficiently. This includes advising on the optimal structure for director remuneration (salary vs. dividends), pension contributions, and identifying opportunities for tax relief like capital allowances or R&D tax credits. Many accountancy firms now offer an all-in-one package that includes bookkeeping services, ensuring a seamless process from daily transactions to year-end filing and strategic advice. This comprehensive service provides the greatest peace of mind for directors.

Key Services Accountants Offer

An accountant's services extend well beyond simply filing your year-end numbers. For a new company, they can provide invaluable support from the very beginning. This includes advising on the most appropriate share structure during company formation and ensuring the company is correctly registered with HMRC for Corporation Tax as soon as it is formed. Many accountancy firms also offer a registered office address service, which can help protect a director's home address from the public register. Furthermore, they will handle the company's registration as an employer with HMRC for PAYE (Pay As You Earn) once you are ready to draw a salary, a critical step that must be completed before any payments are made. This foundational support sets your company up for compliance from day one.

The core of an accountant's ongoing work is managing your key compliance obligations. A central task is filing the annual accounts with Companies House and the CT600 Corporation Tax return with HMRC. They also manage payroll, calculating income tax and National Insurance contributions for employees and directors and reporting this to HMRC in real-time. For VAT-registered businesses, they prepare and submit the quarterly returns through Making Tax Digital (MTD) software. They will also handle the annual Confirmation Statement for Companies House (a £50 online filing fee as of 2025). Finally, a full-service accountant will often prepare the director's personal Self Assessment tax return, ensuring that salary, dividends, and other income are declared correctly.

• Company formation and advice on share structure.
• HMRC registration for Corporation Tax, PAYE, and VAT.
• Registered office and director's service address.
• Bookkeeping using MTD-compliant software.
• Management of PAYE payroll and director/employee payslips.
• Preparation and submission of quarterly VAT returns.
• Preparation and filing of annual statutory accounts with Companies House.
• Preparation and filing of the CT600 Corporation Tax return with HMRC.
• Filing the annual Confirmation Statement with Companies House.
• Director's personal Self Assessment tax return.
• Strategic tax planning and business advice.

Worth knowing: A full-service accountant handles all key filing obligations, from payroll and VAT to annual accounts and tax returns, providing a comprehensive compliance shield.

The Role of Bookkeeping Software (MTD)

Making Tax Digital (MTD) is a government initiative to modernise the tax system. For limited companies, its main impact is currently MTD for VAT. Since April 2022, all VAT-registered businesses, regardless of turnover, must keep digital records and use MTD-compatible software to submit their VAT returns. If your company's taxable turnover exceeds the £90,000 threshold (figure applicable from 1 April 2024), you are legally required to register for and comply with MTD for VAT. This makes choosing and using appropriate software a necessity, not a choice. These software packages typically connect directly to your business bank account via 'bank feeds', automatically importing transactions to be categorised, saving time and reducing data entry errors. They also create professional invoices and can store digital copies of receipts.

It is vital to understand that software is a powerful tool, but it does not replace financial understanding. The 'Garbage In, Garbage Out' principle applies: if you incorrectly categorise transactions, your VAT returns will be wrong, and your year-end accounts will be inaccurate. For example, you must know the difference between a tax-deductible business expense and a non-deductible item, or how to correctly record a director's loan, a capital asset purchase, or a bank transfer. While software simplifies the process, the ultimate responsibility for this data's accuracy lies with the director. This is where a bookkeeper or accountant adds value, by ensuring every transaction is treated correctly from the outset, leading to reliable financial reports.

How to Choose a Good Accountant

Selecting the right accountant is a critical decision for your new company. The title 'accountant' is not legally protected in the UK, so your first check should be for professional qualifications. Look for individuals or firms affiliated with a recognised professional accounting body, such as the ICAEW (Institute of Chartered Accountants in England and Wales), ACCA (Association of Chartered Certified Accountants), CIMA (Chartered Institute of Management Accountants), or AAT (Association of Accounting Technicians) for bookkeeping. Membership in these bodies ensures the accountant is professionally qualified, undertakes continuous professional development, holds professional indemnity insurance, and is subject to a formal complaints procedure. This provides a significant layer of assurance that you are dealing with a competent and regulated professional.

Once you have a shortlist of qualified accountants, evaluate their suitability for your specific needs. Ask about their experience with start-ups and small limited companies, as their needs differ greatly from those of large corporations or sole traders. Enquire about the software they use and ensure it aligns with your preferences. Crucially, you must have a clear, written understanding of their fees. Avoid open-ended hourly rates where possible and request a fixed-fee proposal. This document should explicitly state what services are included in the monthly or annual fee (e.g., payroll for how many employees, VAT returns, personal tax return) and what constitutes an extra charge. Always obtain a formal Letter of Engagement, which serves as the contract between your company and the accountant, before any work begins.

• Are you a member of a recognised professional body like ICAEW or ACCA?
• Do you have professional indemnity insurance?
• What is your experience with micro-entities or companies in my sector?
• Which accounting software do you specialise in (e.g., Xero, QuickBooks, FreeAgent)?
• Can you provide a fixed-fee quote detailing all included services?
• What is your communication process and typical response time?
• Who will be my day-to-day contact at the firm?

1. 1

   Shortlist accountants by checking for membership in a recognised professional body (e.g., ICAEW, ACCA).

2. 2

   Verify they are registered as an agent with HMRC, which allows them to deal with HMRC on your behalf.

3. 3

   Ask for evidence of professional indemnity insurance, which protects you if they make a costly error.

4. 4

   Discuss their experience with companies of your size, in your industry, and their preferred accounting software.

5. 5

   Request a detailed, fixed-fee quote and a list of services that would incur extra charges.

6. 6

   Obtain and carefully review the formal Letter of Engagement before appointing them.

Estimating Costs: DIY, Bookkeeper, and Accountant Fees

The cost of financial management for your new company will fall into one of three broad categories. The DIY approach is the cheapest in direct outgoings, typically limited to a monthly subscription for MTD-compliant accounting software, which can range from £20 to £40. However, this route has a significant, often underestimated, 'opportunity cost'. The hours a director spends learning accounting rules, chasing receipts, and preparing filings are hours not spent growing the business. For a director whose time is valuable, the true cost of DIY can be much higher than the software fee alone. This option is best suited for those with a very simple business model and a high degree of confidence in administrative tasks.

Engaging a freelance bookkeeper to manage your daily records typically costs between £25 and £50 per hour. For a small business with a moderate number of transactions, this might equate to 2-4 hours of work per month (£50-£200), ensuring your records are always up-to-date and VAT returns are filed correctly. A comprehensive, all-inclusive service from an accountancy firm for a typical micro-entity usually costs between £100 and £300+ per month. This fee typically covers software subscription, bookkeeping, payroll for a director, quarterly VAT returns, annual accounts, the company tax return, and often the director's personal tax return. This provides a predictable cost for complete compliance and peace of mind.

Setting Up Your Own Bookkeeping System

If you decide to manage your company's books yourself, establishing a robust system from the very beginning is non-negotiable. The absolute first step, even before you make your first sale, is to open a dedicated business bank account. A limited company is a distinct legal person from its directors, and its finances must be kept separate. Mixing business and personal funds (commingling) is a recipe for disaster. It makes it incredibly difficult to track income and expenses accurately, can lead to HMRC disallowing genuine business expenses during an inspection, and complicates the legal distinction between you and your company. All money flowing into and out of the company must go through this dedicated account.

Under UK law, you must keep company records for at least six years from the end of the last company financial year they relate to. Immediately choose and subscribe to an MTD-compliant accounting software package. Link your new business bank account to the software using its 'bank feed' feature. This will automatically import all your transactions. Your primary task then becomes a regular, disciplined process—ideally weekly—of logging into the software, reviewing each imported transaction, categorising it correctly (e.g., 'sales income', 'office supplies', 'travel'), and attaching a digital copy of the corresponding receipt or invoice. This weekly habit prevents a chaotic backlog and ensures your financial data is always current and accurate.

• All company bank statements and credit card statements.
• Copies of all sales invoices you issue to customers.
• All purchase invoices and receipts for goods and services you buy.
• Details of all money spent by the company (e.g., receipts for expenses).
• Details of all money received by the company.
• Records of any stock owned at the end of your financial year.
• PAYE records if you employ people (including yourself).
• VAT records if you are registered for VAT (e.g., your VAT account and calculations).

Worth knowing: Open a separate business bank account immediately and use MTD software to categorise transactions and attach receipts weekly.

Common Mistakes to Avoid

A primary mistake new directors make is failing to strictly separate business and personal finances. Using a personal bank account for business transactions or vice versa creates an administrative nightmare, makes it impossible to produce accurate accounts, and undermines the company's separate legal status. Another frequent error is missing statutory filing deadlines. There are strict dates for filing annual accounts with Companies House and the Corporation Tax return with HMRC. Late filing of accounts incurs an automatic penalty, starting at £150 and rising sharply. Failure to file the annual Confirmation Statement can lead to the company being struck off the register. These deadlines are absolute, and ignorance of them is not a valid defence.

Many directors also make costly errors in how they take money from the company. You cannot simply treat the company's bank balance as your own. Every penny taken out must be properly accounted for as a salary (requiring a PAYE scheme), a dividend (requiring specific board meeting minutes and a dividend voucher), or a director's loan. An overdrawn director's loan account that is not repaid within 9 months of the company's year-end can trigger a significant tax charge (s455 tax) on the company. Finally, failing to monitor turnover for VAT registration is a common pitfall. If your taxable turnover exceeds the £90,000 threshold in any rolling 12-month period, you must register for VAT. A late registration can result in a penalty based on the VAT you should have paid.

The Accountant's Role in Tax Planning

While compliance is a crucial function, the real value of a skilled accountant lies in proactive tax planning. Their goal is to help you structure your company's finances to be as tax-efficient as possible within the confines of the law. For a director-shareholder, the most fundamental piece of tax planning is determining the optimal method for profit extraction. This involves finding the right balance between taking a salary and paying dividends. A salary is a tax-deductible expense for the company, reducing its Corporation Tax bill, but it attracts both employee's and employer's National Insurance Contributions (NICs). Dividends are paid out of post-tax profits but are typically subject to lower personal tax rates than salary income and attract no NICs.

For the 2025/26 tax year, the calculation involves several factors: the small profits rate of Corporation Tax at 19% (for profits up to £50,000), the proposed 15% employer NICs rate on salaries above a £5,000 secondary threshold, and the director's personal tax allowances. A common strategy is to pay a small salary, often up to the NIC primary threshold where no NICs are due, and extract further profits as dividends. An accountant can also advise on other powerful tax planning tools. For instance, making employer pension contributions directly from the company is highly efficient, as these are typically allowable business expenses and incur no NICs for the employee or employer. They can also identify eligibility for capital allowances on equipment purchases or valuable R&D tax credits if your company is involved in innovation.

Common questions

Official sources & further reading

This guide draws on the official guidance below. Rules, fees and individual circumstances can change; check the relevant source before acting.

• Running a limited company: your responsibilities - GOV.UK
• Company accounts and returns guidance - Companies House
• Corporation Tax rates and reliefs - GOV.UK
• VAT registration - GOV.UK
• Companies Act 2006, Part 15: Accounts and Reports - legislation.gov.uk

General UK information, primarily for private companies limited by shares. This is not personalised legal, tax or financial advice. An accountant or solicitor can help apply the rules to your situation.