How to manage your accounts and bookkeeping as a sole trader
Posted: Thu 25th Jul 2024
Originally published at sage.com.
As a sole trader, bookkeeping and managing your accounts are the key tasks you have to deal with.
But because you’re self-employed and looking after so many aspects of the business yourself, it can be easy to let the accounts slide as other tasks frequently take priority.
This article offers advice on what you need to do manage your accounts and bookkeeping as a sole trader.
It talks about getting set up, taxes you’ll need to be aware of, what you need to do to register for VAT (if necessary), and how to stay on top of your finances.
What is bookkeeping and why is it important?
Bookkeeping involves keeping accurate records of all the money going in and out of your business.
It can be a daunting task as every receipt, invoice, and bill must be logged, however it’s essential for creating the likes of accurate tax returns and business plans.
While accounting covers the more general process of managing your accounts and can involve strategic planning, sole trader bookkeeping goes into the details.
Every single point of income or expenditure is noted, from business transactions to company expenses.
This should be a daily process, to ensure all the transactions from the day are logged correctly.
As a sole trader, the legal and financial responsibility falls on you.
Any errors that incur fines or even legal action will affect you personally, as you are not protected by a limited liability company (LLC).
So, it’s useful to get into good habits right from the start and set up a sensible workflow to help streamline and automate any part of the process you can.
First steps when managing your accounts as a sole trader
Firstly, you’ll need to register with HMRC and make sure you understand its rules on running and naming your business.
As a sole trader, you’re responsible for the business. You’ll be classed as self-employed, although you can still take on staff.
As a sole trader, you must:
keep records of your sales and expenses
submit an annual Self Assessment tax return and pay income tax on your profits
pay Class 2 (this is no longer the case from 6 April 2024) and Class 4 National Insurance
register for VAT (if your turnover is over the VAT threshold – although you can do this even if it’s under the threshold)
take responsibility for any business debts
You’ll need to keep a record of all your invoices and receipts for six years.
HMRC carries out random checks on businesses to check they are compliant with tax regulations, so you’ll need to hang on to all the paperwork and make sure it’s accurate and up to date.
Anything that’s a business cost (known as allowable expenses) can help reduce your tax bill at the end of the year.
This includes:
computer equipment and internet access
rent
stationery
phone bills
travel to customer premises
motor expenses
It pays to get into good habits from the beginning when it comes to keeping track of receipts.
If you regularly get the train to go and see your clients, always keep the tickets in a separate part of your bag, or buy them online before you go so you have an email record.
When you buy anything for the business, including a coffee ‘on expenses’, always request the VAT receipt – some shops don’t issue a receipt by default.
What expenses can you claim as a sole trader?
As a sole trader there are a variety of expenses you can claim to offset your expenditure.
Office supplies: Such as office furniture, a work computer, and stationery
Travel and accommodation: Transport costs including fuel or hotel stays that you incur for work
Some clothing: Uniforms, or performance-specific clothes, for example
Your staff: Contractor pay or staff salary
Commodities that you buy and sell: Stock and raw materials, such as gold
Insurance and other financial costs: Bank charges, for example
Your business premises: Costs such as heating, lighting, and business rates
Your business promotion: The cost of running websites, marketing, and advertising your company are all claimable
Business and employee training: Courses to advance your skills or those of your team.
What taxes do you need to pay as a sole trader?
As a sole trader, there are several taxes you have to pay to HMRC:
Income tax
As a sole trader, detailed bookkeeping is crucial as you must report your business profits at the end of each tax year.
Your accountant (if you have one) will need a full set of your accounts showing your sole trader income and expenditure, from which they can work out your tax liability.
You need to pay your tax on this income by the following 31 January (you need to submit your tax return by this date too).
It makes sense to complete this process much sooner – don’t put it off until the night before the deadline.
Once you’re in the system and have paid your first return, you need to pay tax twice a year, on 31 January and 31 July.
This is known as payments on account.
Each payment is equal to half the amount of tax you owe for the previous tax year.
Top tip: It’s good practice to put aside 30% of everything you earn. Consider setting up a separate bank account for this so you know the money is there to pay for tax, National Insurance and VAT when you need it.
National Insurance
When you set up as a sole trader, you need to let HMRC know.
You need to pay your quarterly Class 2 National Insurance bill, which is a basic payment that goes towards your state pension in the future.
Any extra Class 4 National Insurance payments will be calculated by your accountant at the end of your tax year.
Top tip: Sometimes self-employed people have a mix of permanent employment and freelance work on the go. For example, someone who works in a bank during the week but writes children’s books in the evening or has a side business making jewellery.
Just make sure you’re not doubling up on your National Insurance contributions.
VAT
As a sole trader, you need to register for VAT if your turnover is more than the current threshold, which is £85,000.
You can register voluntarily even if you are below the threshold, and some sole traders decide to do this because it implies you’re a more established, trustworthy business.
You’ll be able to claim the VAT back on everything you buy for the business, which will be advantageous if the nature of your business is buying stock and selling it on.
If you charge for your time, like a designer or business coach, registering for VAT voluntarily won’t bring you so many financial advantages.
You can opt for the standard VAT scheme or Flat Rate VAT, which was set up to help reduce the admin load for smaller businesses.
In the Flat Rate scheme, you charge your customers at the standard rate of VAT and pay the money back to HMRC at a lower rate, depending on the nature of your business.
Top tip: Make sure you pick the right category – there are lots to choose from and some of them sound similar but have different rates. Do double check with your accountant to make sure everything is in order from day one.
PAYE
As a sole trader, at some point you may need to take on staff.
As a bookkeeper for your sole trader business, you must record the PAYE and National Insurance details accurately and keep them for three years from the tax year-end they are incurred.
This can include:
employee pay and any deductions you make including pension schemes
employee absence, including leave and sickness
expenses or benefits incurred by your staff
any charity-matching expenses applied to on the Payroll Giving Scheme
Open a separate bank account for your business
When you start out, it’s a good idea to set up a separate business bank account so your personal and company finances are kept apart.
This will make it easier for you to manage your accounts and bookkeeping as a sole trader.
It’s one of those jobs you’ll thank yourself for later as your business grows and there are more and more transactions happening relating to the business.
It will also help you keep an eye on cash flow. You need to get into the habit of chasing invoices early to make sure you have plenty of money to cover your business costs.
You could also consider requesting deposits and staggered payments on larger jobs, rather than waiting for the project to be completed in full before you send your bill.
What records do I need to keep as a sole trader and for how long?
Sole trader bookkeeping requires keeping your financial and business records up to date, as a daily process.
HMRC may ask for a detailed breakdown, including receipts, so knowing what to keep track of is essential.
This should include:
your business sales and income including invoices and receipts
your personal income
your business expenses (and those of any staff you employ)
any applicable VAT records if you’re registered for VAT
any staff PAYE records if you employ people other than yourself
You may also need to keep other records such as any money you are owed but have not received, your year-end bank balances, or any money you’ve taken out for your own use.
All records and receipts must be kept for a minimum of five years from the 31 January submission deadline of the relevant tax year.
How cloud accounting software can help you
When it comes to managing your accounts and bookkeeping as a sole trader, having an effective, intuitive system in place can make all the difference.
Accurate records
If you are entering all your transactions into cloud accounting software throughout the year, you’ll be keeping accurate records as you go.
Using cloud accounting software as a sole trader also means you can cut down on paper, saving you money and space – the latter may be in short supply in your home office or workshop.
And because each time you add a new supplier to the system you’ll be making note of their full contact details, you don’t have to worry about keeping an address book up to date.
Better chance of getting paid on time
It’s good practice to keep on top of your accounts.
Depending on the size and complexity of your business, this could be monthly or weekly. By finding time to do it regularly you can quickly clear up any queries… what was that receipt for again?
Or you can spot someone who hasn’t paid their invoice on time and gently suggest that you can’t do anymore work until you’re all square.
You can create also quotes and invoices, customised with your branding and full contact details, which can be emailed to customers in PDF format.
This speeds up the whole process of getting the work – and getting paid for it.
And when it comes to getting paid for the products or services you’re selling, using an online payments provider such as GoCardless or Stripe can make life easier.
Submit VAT returns to HMRC
What counts here is speed and accuracy. With accounting software, you can run off your VAT return in minutes, check the figures and submit it to HMRC.
If you set up a direct debit, the money will be deducted on the 10th of the month following your VAT quarter, meaning no missed deadlines and no penalties – good news for the sole trader keeping a close eye on their bank balance.
FAQs on managing your accounts as a sole trader
Do sole traders need bookkeeping software?
There can be a lot of record keeping for sole traders to stay on top of, so bookkeeping software can make keeping accurate records easier.
The government is phasing out non-digital forms of accounting.
From April 2026, the government will introduce Making Tax Digital for Income Tax Self Assessment, where accounting must be done using cloud-based software.
So, starting now will give you plenty of time to get used to the process before it becomes mandatory.
Do I need an accountant as a sole trader?
As a sole trader, you’ll be wearing many hats for your business.
However, accounting is one that you shouldn’t scrimp on as any inaccuracy or failure to register correct tax information can have repercussions for you personally.
Hiring the right accountant for your sole trader business will help free up your time to concentrate on other essential areas, like sales and marketing, or strategy planning.
Do I have to pay VAT as a sole trader?
If your sole trader business earned more than £85,000 in the past 12 months, or will be expected to go over the threshold in the next 30 days, you must register for VAT, and by 30 days of having exceeded the threshold (note: the threshold increases to £90,000 from April 2024).
The government has also made MTD for VAT mandatory.
Now any VAT-registered business, including sole traders, must submit all VAT returns digitally and keep records with cloud accounting software.
Choosing the right software can ensure your records are always up to date.
Editor’s note: This article was first published in September 2018 and has been updated for relevance.
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