A Guide to Sole Trader Accounting

Sole Trader Accounting refers to managing and reporting the financial transactions of a sole trader — essentially an individual who runs their own business.

While it might seem daunting, understanding accounting is crucial for maintaining a healthy financial position for your business. This guide aims to break down the complexities of sole trader accounting into easy-to-understand terms and steps, helping you keep track of your income, expenses, and your business’s profitability.

A guide to sole trader accounting

Setting up a Sole Trader Business

When starting a business as a sole trader, you’ll need to register your business with HMRC. You’ll also need to decide whether you’ll use the cash or accrual accounting basis. We will walk you through the process.

The cash basis means recording income when it is received and expenses when paid out, whereas the accrual basis records income when it is earned and expenses when they are incurred.

Registering with HMRC

When registering with HMRC as a sole trader, you must provide your business name, national insurance number and contact details, and the nature of your business. You’ll also have to inform HMRC of when you started trading.

You must register by the 5th of October to submit a self-assessment return for the tax year. An example is a business that starts trading on 1st September 2024. They must complete a self-assessment tax return for the year ending 5 April 2025 and register by 5 October 2025.

Once this is complete, HMRC will assign a Unique Taxpayer Reference (UTR) that must be included in all communications with them.

Sole Trader Bank Account

As a sole trader, you do not have to open a separate bank account if you split your personal income and expenses to the business’s transactions. But, it is recommended that you open a business bank account; most major banks offer business banking. This will help you separate your personal and business finances for accounting purposes, making tracking expenses and income more straightforward.

What Business Records do I need?

You must keep accurate records of sole trader income and expenditure when running a business. This will help you monitor your performance more accurately and aid with forecasting cash flow.

You should keep all relevant documents, such as invoices, bank statements, receipts, emails, etc., for at least six years from the 31st January submission deadline for your tax return.

These documents can be kept in paper format or digitally but must include relevant details such as the date, amount received or spent, and a brief transaction description.

Keeping Track of Sole Trader Business Expenses

It’s important to keep track of all business expenses and ensure that no personal spending is included in your accounts. Business costs are anything you have spent money on to help you earn your income, such as office supplies or travel costs. We will look at the types of business expense a sole trader can claim later.

It’s also important to remember that all business costs must be reasonable and necessary to run your business. HMRC will look at any excessive expenditure as a possible indication of tax avoidance.

Options for Sole Trader Accounting

Keeping track of your business transactions can be time-consuming and complex. Fortunately, a range of options are available for sole traders to help make the process easier and more efficient. The options are:

Ledger Book

A ledger book is the most traditional method of recording business transactions and is an easy way for sole traders to keep track of their accounts. Ledger books are available on Amazon and other stationery stores. They are made up of columns and rows, enabling you to record each transaction.

Excel Spreadsheet

Excel spreadsheets are an alternative to ledger books and can be used to organise your financial records. They offer the benefit of summarising transactions into a clear, concise overview. Many sole traders like using Excel as they are already familiar with it and can design spreadsheets around business needs.

Excel Bookkeeping Templates

Excel bookkeeping templates are available to download and provide the perfect way for a sole trader to keep their accounts in order. They are usually pre-formatted with columns and rows, ready for you to fill in as appropriate.

At Business Accounting Basics, we have a range of bookkeeping templates, including a cash book to record income and expenses.

Cash Book Template

Cloud Accounting Software

Cloud accounting software is a great tool for sole traders wanting to stay on top of their accounts. It removes the need to create reports or enter information into spreadsheets manually. Most online accounting software allows users to connect with their bank accounts so transactions are automatically imported, making it easier to reconcile accounts.

 

Read our guide on the top accounting software packages, QuickBooks vs. Xero. Here are our top cloud accounting software options:

QuickBooks

QuickBooks is one of the most comprehensive accounting software packages available, offering a sole trader plan which will calculate taxes owed. It has various income and expense tracking features as well as invoicing and reporting capabilities. QuickBooks allows users to connect their bank accounts so transactions are automatically imported, making it easier to reconcile accounts.

QuickBooks Banner advert

Pricing

QuickBooks offers three packages: the self-employed package is available for £10.00 a month, the Simple-start for £14 a month and the Essentials package for £24 a month. All packages include ongoing free support.

Visit QuickBooks

Xero

Xero is another great online accounting software which includes all of the features found in QuickBooks but is more expensive. It also has a range of features for invoicing and tracking income and expenses. It has a user-friendly dashboard and lots of training videos as well as integration with 3rd party apps.

Example of Xero Dashboard

Pricing

Xero offers four packages: the starter package is available for £15 a month, the Standard package for £30 a month and the Premium package for £42 a month. The starter is restricted to 5 bills and 20 invoices.

Xero discount

FreshBooks

FreshBooks is a well-designed accounting software designed for small businesses. It offers invoicing, time tracking and expense management features. It allows you to connect with your bank account so transactions are automatically imported.

Pricing

FreshBooks offers three packages: the Lite package is available for £12 a month, the Plus package for £22 a month and the Premium package for £35 a month.

FreeAgent

FreeAgent is a cloud-based accounting solution designed for small businesses and is excellent for freelancers. It offers easy invoicing, reporting and expense-tracking features. It also has a Bank Feeds feature, which imports bank statements and categorises them so you can easily reconcile accounts.

Pricing

FreeAgent offers a FREE version if you hold a business account with either NatWest, Royal Bank of Scotland or Ulster Bank NI. The plans available are either monthly £19 or annual £95pa.

Zoho Books

Zoho Books is an online bookkeeping software for small businesses. It offers a range of features, including invoicing, expense tracking and reporting. It also enables automatic bank feeds. One advantage of Zoho Books is the range of business apps available for growing businesses.

Pricing

Zoho Books offers a free package with revenue up to £35,000, standard for £10 per month, including up to 5,000 invoices and Professional for £20 per month.

Professional Accountant/Bookkeeper

Finally, a professional accountant or bookkeeper can take on this task if you don’t have the time or inclination to manage your sole trader accounts. They can provide more detailed and accurate financial reports and offer advice and guidance on making tax savings.

So, as you can see, there are plenty of options for sole traders to help keep their accounting in order. Whether you use an Excel spreadsheet, bookkeeping template or online accounting software, it’s important to ensure that all records are kept up-to-date and secure.

What business costs can sole traders claim?

When running a business as self-employed, there are certain allowable costs that you can claim to reduce your taxable bill and take advantage of any available tax reliefs. They include:

Advertising and Marketing

Any costs spent on advertising and marketing your business, such as website design and hosting fees or print materials like flyers and brochures.

Bank Charges

Any fees or charges incurred for business banking, such as overdraft fees or payments by credit card.

Business Premises

This includes rent, maintenance and repairs to business premises.

Equipment

The cost of any equipment needed to run the business, such as computers, phones, furniture, etc.

Home Office Expense

If you use part of your home, you can claim for home office expenses. There are two options: claiming a percentage of actual costs or using simplified expenses.

Insurance

Any insurance related to running the business, including public liability, professional indemnity and travel insurance.

Professional Fees

Any fees you have paid for professional advice, such as accountants or solicitors.

Staff Costs

As a sole trader, if you employ staff, their salaries and associated costs are allowable.

Subcontractors

The business cost of any contractors or freelancers you employ to help run your business.

Travel Expenses

Travelling costs related to running your sole trader business include parking, fuel, train fares and hotel stays. You can’t claim travel between your home and your regular place of work.

This is not a complete list, and as a small business owner, you must decide if the costs are necessary and reasonable. HMRC has the right to disallow any claims it deems excessive or unnecessary.

Sole Trader and VAT

As a sole trader, if your turnover in any 12 months either goes over or expects to go over the threshold of £90,000 (from 2024), you must register for VAT. There are different VAT schemes available, and it is worth taking the time to decide the best scheme for your business.

Sole Trader and Making Tax Digitial

As part of the government’s Making Tax Digital initiative, from April 2019, all VAT-registered businesses must use software to submit their returns digitally. This applies to both quarterly and annual VAT returns.

From 2026, HMRC is also planning for Self-Assessment returns to be done digitally, so sole traders may have to get used to submitting returns through accounting software or use a bookkeeper to keep the records.

Annual Self-Assessment Tax Returns

A sole trader must complete an annual Self-Assessment tax return. This needs to be done by the due date of 31st January each year. To complete the self-assessment tax return, you will need the following information:

  • Business income and expenses and evidence to support it
  • Bank statements
  • Pension contribution records
  • Investment income records such as dividend certificates from shares or interest certificates from savings accounts.
  • Any other business-related income, such as rental income, royalties, etc.
  • P60 for employment income

Once completed, you can submit the return online via HMRC. As part of the process, you will receive a calculation for tax; this is made up of the following:

Self-Employed Income Tax

Income tax is calculated as a personal allowance, basic, higher and additional rate bands. Depending on your income will depend on how much tax you will pay.

Class 4 National Insurance

Self-employed Class 4 NICs are payable on profits over a certain threshold, currently £12,5702pa for the 2023/241 tax year. You will pay 9% between £12,570 and £50,270 and 2% on profits over £50,270.

Class 2 National Insurance Contributions

It is a fixed rate of £3.45 per week for a sole trader.

If you would like to calculate your self-employed income tax and National insurance contributions, use our self-assessment tax calculator.

UK Self employed tax calculator

When do I Pay Tax as a Sole Trader?

You pay income tax and NI to HMRC, and there are two payment dates, 31st January and 31st July each year, depending on your annual income. The tax calculation will give you the amount for each instalment.

Sole Trader Accounts Conclusion

To sum it up, being a sole trader comes with a lot to think about. You’ve got to handle business expenses, understand your tax responsibilities, and ensure you follow the HMRC’s digital submission rules.

When it comes to expenses, things like advertising, bank charges, equipment, and professional fees can be claimed to lower your tax bill. Oh, and don’t forget, if your turnover exceeds £85,000, you must register for VAT.