If you are a sole trader, accounting and bookkeeping are among the most important jobs you must take care of.
Since you’re self-employed and managing all aspects of your company independently, it may be tempting to let the balances slip because other tasks usually have priority.
This article provides information on managing your books and accounts when you are a sole trader.
The article discusses getting your business set up, tax obligations you’ll have to know about, what you must complete to register for VAT (if required) and how to manage your financials.
This is what we will include:
- Bookkeeping: What exactly is it? And what is its significance?
- The first steps to managing your accounts as a sole trader
- What costs can you be able to claim as a sole trader?
- What tax must you pay as a sole trader?
- Set up a separate business bank account.
- What documents must I retain as a sole trader, and for how many years?
- Cloud accounting software can benefit you.
- FAQs for the management of your accounts as a sole trader
Table of Contents
What exactly is bookkeeping, and why is it so important?
The bookkeeping process involves keeping precise books of all the funds that flow into and out of your company.
It’s a challenging task since every receipt, as well as invoice and bill, has to be documented, but it is essential to create the kind of taxes and business plans.
While accounting is the general aspect of managing your account and could involve the strategic planning of a sole trader, bookkeeping is more specific.
Every single source of revenue or expense is documented, from business transactions to business expenses.
This should be a regular procedure to ensure that every transaction of the day is recorded correctly.
As a sole trader, the legal and financial burden is on you.
Every mistake that results in penalties and even legal actions can be detrimental to you personally since you’re not covered by a Limited Liability Company (LLC).
Therefore, it’s beneficial to develop good habits at the beginning and then create a logical process to simplify and automate any aspect, especially when using the Services of Ledger Group in Tally.
The first steps to take when handling your account as a sole trader
In the beginning, you’ll need to first register with HMRC and be sure to know the rules for the running of your business and its name. Additionally, consider seeking professional Bookkeeping Services to help you manage your finances and ensure compliance with tax regulations.
If you’re a sole trader, you are responsible for the company. You’ll be classified as self-employed, but you can still hire employees.
As a sole trader, you must:
- Keep a record of your expenditures and sales.
- Complete your annual Self-assessment tax return and pay tax on income gains.
- Pay Class 2 and Class 4 National Insurance
- You must register to be VAT registered (if your sales are over the threshold for VAT – though you can do this even if your turnover is below the threshold)
- Accept responsibility for all business financial obligations.
You’ll be required to keep a list of all invoices and receipts for the past six years.
HMRC conducts random audits on companies to make sure that they’re compliant with tax regulations. So, you’ll have to adhere to all your documents and ensure they are current and accurate, which is a critical part of a sound financial and tax planning, including aspects like the Spread Trading Strategy.
Everything considered a business expense will help you reduce your tax liability at the close of each year.
This includes:
- Internet access and computers
- Rent
- Stationery
- Telephone bills
- Transfer to the customer’s premises
- Motor costs.
It’s essential to develop good habits at the beginning in keeping records of receipts.
If you frequently take trains to travel and meet your clients, keep your tickets in a different part of your purse or purchase them online before you leave to ensure you can keep an email address.
If you purchase anything for your business, such as a cup of coffee on expenses, Always ask for the VAT receipt. Some shops do not provide a receipt automatically.
What expenses are you able to be able to claim as a sole trader?
As a sole trader, there are a myriad of expenses that you can use to offset your costs.
- Office items: Such as office furniture as well as a computer for work and stationery
- Accommodation and travel: Transport costs, which include fuel and hotel stays you pay to perform your work
- Specific clothing: Uniforms or performance-specific clothing, like
- Your staff members: Contractor pay or salary for staff
- Commodities that you purchase and sell Raw materials and stocks like gold
- Other financial expenses: Bank charges, for instance.
- Your business’s premises: Costs such as heating, lighting, and business rates.
- Your business’s promotion: The cost of operating websites, marketing and advertising for your business can be claimed in full
- Training for employees and business: Courses to advance your capabilities or the skills of your employees.
What tax obligations do you have to pay as a sole trader?
As a sole trader, there are a variety of taxes you are required to be able to pay HMRC:
Income tax
If you are a sole trader in accounting, thorough bookkeeping is essential since you have to report your profits from business at the close of each tax year.
The accounting professional (if there is one) will require a complete account of the expenses and income to calculate your tax obligations.
You must pay the tax due on this income by 31 January (you must file your tax return on time, as well).
It is sensible to finish this procedure earlier. Take your time at the last minute, just before the date.
Once enrolled in the system and have filed your first tax return, you must pay tax twice yearly on 31 January and 31 July.
This is referred to as a payment on account.
Each payment equals half of the tax you owe from the previous year.
Tips for the web: It’s good practice to save 30% of your earnings, especially if you’re managing a business in a place like Dubai where you need to consider factors such as a Dubai trade license. You should set up an account in a separate bank for this purpose so that you are aware the funds are available to cover tax, National Insurance, and VAT whenever you require it.
National Insurance
If you establish yourself in the sole trading business, you should notify HMRC to be aware.
You must pay your Class 2 quarterly National Insurance bill, a minimum payment to be used toward your state pension shortly.
Any additional Class 4 National Insurance payments will be figured through your tax accountant after the time of the tax year’s end.
The best tip: Sometimes self-employed people have various permanent jobs and freelance work while moving. For instance, a person works at one of the banks on a weekday but writes books for children at night or runs an additional business that makes jewelry.
Be sure to avoid paying double the amount of your National Insurance contributions.
VAT
If you are a sole trader, you are required to declare VAT if the turnover of your business is greater than the threshold at present of £85,000.
You can register for a voluntary registration even if you still need to reach the threshold. Many sole traders register voluntarily since it suggests you’re an established and credible company.
You’ll be eligible to take advantage of the VAT rebate on the purchases you make for your business. This is beneficial if your business is purchasing stocks and then selling them.
When you charge for time, such as an accountant or designer, and you are a business coach, you will need more than just registering for VAT alone to provide you with many financial benefits.
Flat Rate VAT, which was created to lessen the administrative burden for small firms, is an alternative to the VAT standard plan.
Under a flat Rate plan, bill your customers the standard VAT rate and return the cash to HMRC at a lower rate, based upon the type of business you operate.
Tips: Make sure you pick the correct category. There are many categories to choose from, and some are similar yet differ in their rates. Consult your accountant to ensure everything is in order starting from the beginning.
PAYE
As a sole trader, At some point, you will need to hire employees. As an accountant for your sole trader enterprise, you must record PAYE and National Insurance details accurately and keep them for at least three years following the tax year’s close when they are due.
This could comprise:
- Payroll and deductions you make, including pension schemes
- Leave of absence for employees and illness.
- Costs or benefits that your employees pay
- All charity match-up expenses are reflected through the payroll-giving scheme.
Create a separate bank account for your business.
Initially, you should establish an account for your business separately so that your personal and business finances remain separate.
The result will mean it is simpler to manage your account and bookkeeping when you are an individual trader.
This is one of the jobs that you’ll appreciate later on as your company grows and there are ever more transactions taking place about the business.
It can also help you monitor the flow of cash. It is essential to establish the habit of tracking invoices before the due date to ensure that you have enough money to cover your business expenses.
It is also possible to request instalments and staggered payments for more significant projects instead of waiting for your project to be completed before you pay your invoice.
What documents must I keep for sole trader, and for how many years?
Sole trader bookkeeping involves keeping your business and financial documents up-to-date in a continuous manner.
HMRC might request a full breakdown of receipts and other information and tax receipts, so knowing what you need should be kept track of vital.
This includes:
Your company’s sales and earnings, including receipts, invoices and invoices
- Your earnings
- Business expenses (and the costs of any staff you hire)
- All relevant VAT records If you’re a VAT-registered business
- Employee payroll records for employees who you do not employ.
It is also possible to keep other records, such as any amount you’re due but have yet to receive. Also, keep track of your end-of-year financial balances and any funds you’ve taken out for personal usage.
All receipts and records must be kept for at least five years after the deadline for submission of tax returns on 31 January of the tax year in question.
Cloud accounting software can assist you.
When handling your books and accounts for a sole trader, having a well-organized, efficient process in place could be the key to success.
Complete records
If you’re entering every transaction into cloud accounting software all of the time, then you’ll keep exact records throughout the year.
Utilizing cloud-based accounting software as a sole trader means that you will not have to use as much paper, which saves you both space and money. Space may be limited in your office at home or in a workshop.
Every time you add a new supplier to the system, you’ll take note of their contact information, so you don’t need to be concerned about keeping your up-to-date address book.
More chance of being paid on time
It’s essential to stay up with your accounts.
Based on the complexity and size of your company, This could be done daily or monthly. When you can schedule time for it frequently, you can swiftly answer any questions… What was that receipt actually for?
If you observe someone who has yet to settle their bill on time, gently advise them to continue working once you’re back in the same place.
It is possible to create invoices and quotes customized with your logo and contact details. These can be sent out to clients as PDF files.
This speeds up the entire process of obtaining the work and receiving the money for it.
Send VAT returns to HMRC.
What is essential here is speed and precision. With accounting software, you can fill out your VAT return within minutes, check the figures, and then submit the return to HMRC.
If you establish direct debits, the funds will be debited on the 10th of each month following your VAT quarter. That means that there will be no missed deadlines or penalties. This is excellent news for the sole trader who keeps a check on their balance in the bank.
Questions about managing your accounts as a sole trader
Do sole traders require software to manage their books?
There are numerous records that sole proprietors must keep on top of. Hence, software for bookkeeping can help keep precise records much more accessible.
The government is slowly phasing out traditional forms of accounting that do not use digital technology.
The government will introduce Making Tax Digital for Income Tax Self-Assessment in April 2026, requiring the use of cloud-based software for accounting tasks.
Therefore, beginning now gives you time to become accustomed to the procedure before it becomes required.
Do I require an accountant if I am a sole trader?
As a sole trader, you’ll have several hats in your company.
However, accounting is a subject that you should not put off because any error or failure to submit accurate tax information could affect your situation.
The right accountant to run your sole trader business can allow you to focus on other important areas like marketing sales and strategy development.
Do I need to pay VAT if I am a sole trader?
If your sole trader business has earned more than £85,000 over the past 12 months or is likely to exceed the threshold within the coming 30 days, it must be VAT registered within 30 days after exceeding the threshold.
The government also has introduced MTD for VAT compulsory.
All VAT-registered businesses that are not sole traders must file all VAT returns electronically and maintain documents cloud-based accounting software.
Selecting the right software will make sure that your records are always current.
