Intuit QuickBooks Small Business Index, December 2024
STARTING YOUR OWN BUSINESS
Accounting and bookkeeping: A guide for sole traders
Embarking on the journey of working for yourself as a sole trader? If you are, managing your accounts and bookkeeping is essential.
From recording income and expenses to understanding tax obligations, keeping track of your finances means you stay on the right side of tax regulation. Equally important, it gives you less hassle and more peace of mind.
If it seems a bit intimidating, don’t worry: we've got you covered.
Say goodbye to accounting headaches and let us simplify the process for you. Here are the essential steps to get your sole trader accounts set up and running smoothly.
In a nutshell:
What is a sole trader?
A sole trader is an individual who runs their own business and keeps all of its income. This business structure differs from partnerships, where income is shared.
Although sole traders are self-employed, the term specifically refers to how their business is set up, while self-employed’ relates to tax status.
Sole traders can employ staff without changing their tax classification, and they might claim employee wages as expenses. Registration as a sole trader is mandatory if annual earnings exceed £1,000, but some choose to register sooner to access benefits such as tax-free childcare.
Check whether you’re a sole trader
The first step to setting up your sole trader accounts is to check that you’re a sole trader, not a partnership or limited company. If you run the business by yourself, operate under your own name, are responsible for all liabilities, and haven’t formed a separate entity like a corporation, you are likely a sole trader.
Here are the differences between sole traders and limited companies in the UK.
Why bookkeeping is important for sole traders
Accounting is important for sole traders, as you need accurate financial records to stay compliant with HMRC and the law. It helps you stay on top of cash flow, aids in making essential business decisions, and reduces the risk of financial errors and penalties.
Your financial responsibilities as a sole trader include the following:
Submitting annual Self Assessment tax returns to HMRC
Paying your taxes on time, including income tax and NICs
Maintaining accurate records for at least the last 5 years
Complying with legal requirements specific to your industry
Ensuring you have the cash flow to pay any employees
Other responsibilities for a successful business include marketing and promoting your business, ensuring a safe environment, and good customer service.
Register as a sole trader with HMRC
To set up your sole trader accounts, the first step you’ll need to take is to register with HM Revenue and Customs (HMRC). You might be wondering how to go about this process.
Fortunately, we've got you covered with our comprehensive step-by-step guide on registering as self-employed.
Remember, you need to keep HMRC informed of every change in your tax status, whether you’re starting, stopping or altering any part of your self-employment. This means that they will be kept aware of when and if to expect your tax returns.
How do I choose a name for my business?
Pick a suitable name for your business. It creates your brand identity, helps establish customer credibility, and distinguishes your company in the market.
When choosing, avoid complex or difficult-to-spell names, names that infringe on existing brands, names that are specific to one location (in case you expand), or names that use language that may offend or alienate your potential customers.
Examples for sole traders may include your name and a clue to what your offering is, for example, ‘Smith’s Plumbing Services’ or ‘Emma’s Elegant Weddings’.
Set up your sole trader bank account
While it's not a legal requirement for a sole trader to have a separate business bank account, there are significant advantages to keeping your business and personal finances separate. For example:
Legal compliance and transparency
Simplified bookkeeping and tracking
Enhanced professionalism
Efficient tax preparation
Improved financial analysis
Facilitates business growth
This is because operating with only a personal bank account will mean you’ll need to meticulously differentiate between personal and business expenses, adding complexity and consuming more of your time.
By having a dedicated business bank account, you can easily track and record your business-related expenses and income. This simplifies the process of completing your annual accounts and Self Assessment Tax Return, saving you valuable time and effort.
Keep track of income and expenses
Now your bank account is set up, the next step is to record your income and expenses.
Accurate record-keeping is crucial for managing your sole trader accounts effectively. To maintain a clear overview of your business finances, it's essential to record your income and expenses systematically.
What records do you need to keep as a sole trader?
Here are the key records any sole trader should keep:
Invoices and receipts: document all sales and purchases with clear invoices and receipts. This will serve as proof of income and expenses for tax purposes.
Bank statements: retain statements from your business bank account.
Tax records: keep copies of any tax returns submitted to HMRC, as well as supporting documents like P60s or tax calculation summaries.
Business Plans and financial statements: maintain copies of your business plans, budgets, and financial statements.
Payroll Records (if applicable): if you have employees, ensure that payroll records, including payslips and tax deductions, are accurately maintained.
For income, create a system to track and document all sources of revenue, including sales, services rendered, or any other sources of income related to your business activities.
What counts as income for sole traders?
Sales of goods or services
Fees and commissions
Payments received from clients or customers
Interest earned on business bank accounts
Rental income from business properties
Other sources directly related to the business
Be diligent in recording the amounts, dates, and details of each transaction.
Similarly, meticulously track your business expenses. This includes purchases, bills, and any other costs incurred for your business operations.
What can sole traders claim as expenses?
Office expenses (stationery, postage, etc.)
Rent, rates, power, and insurance costs for business premises
Office equipment, like computers, software, and furniture
Travel costs (fuel, parking, public transport) for business journeys
Utility bills (gas, electricity, water) if used for business purposes
Phone and internet bills for business use
Advertising and marketing costs
Professional fees (accountant, lawyer, etc.)
Training courses directly related to the business
Cost of goods sold (materials, stock, etc.)
Bank charges and interest on business loans
Repairs and maintenance of business assets
Vehicle expenses (mileage, repairs, insurance) if used for business purposes
Keep receipts and invoices organised, categorise expenses appropriately, and note down the purpose of each expense. Read our blog on self-employed allowable expenses here for more information about what you can claim from HMRC.
How to choose a record-keeping method
Spreadsheets can be a practical solution for record-keeping when managing your sole trader accounts. This is if you prefer a hands-on approach and want the flexibility to create your own invoices. However, it is worth noting that spreadsheets may have limitations in terms of functionality and reporting capabilities.
Alternatively, many business owners choose to use commercial bookkeeping software. These tools offer a range of features such as expense and income tracking, invoice creation, and automatic bank account feeds.
Online accounting systems are increasingly popular among sole traders and small businesses due to their convenience and added functionalities. These systems eliminate duplication and offer features which will save you time and money.
By maintaining detailed records of your income and expenses, you'll have a solid foundation for accurate financial reporting, tax calculations, and business analysis.
This gives you a clearer picture of your financial performance as a sole trader.
How long do I need to keep records of my business?
As a UK sole trader, it’s important to keep your business records for at least five years after the 31 January deadline following the tax year they relate to.
For example, if you submit your tax return for 2023-2024 by 31 January 2025, you must keep your records until at least 31 January 2030, in case HMRC decide to audit them.
Manage and pay your tax obligations
As well as your income and expenses, it's crucial as a sole trader to understand your tax obligations and set aside the necessary funds each year.
This is essential for completing your Self Assessment, which determines the amount of tax you owe.
So, familiarise yourself with the income tax thresholds and National Insurance Contributions (NICs) applicable to your earnings. Each tax year has a Personal Allowance, currently set at £12,570 (2023/24), which allows you to earn income tax-free.
Income Tax
Income above this threshold is subject to varying tax rates:
Basic Income Tax rate (20%): Applies to income from £12,571 up to £50,270.
Higher Income Tax rate (40%): Applies to income between £50,271 and £125,140.
Additional Income Tax rate (45%): Applies to income over £125,140.
Sole traders are also responsible for paying Class 2 and Class 4 NICs.
National Insurance
Class 2 NICs, at a rate of £3.45 per week (2023/24), are payable directly to HMRC if your profits exceed £6,725 per year.
Class 4 NICs, at varying rates (9% on profits between £12,570 and £50,270, and 2% on profits over £50,270), are paid through Self Assessment.
Remember to consult HMRC resources for detailed information on tax and National Insurance for the self-employed to ensure compliance with the latest regulations.
PAYE
PAYE stands for Pay As You Earn and applies to sole traders with employees.
As an employer, the sole trader has to deduct income tax and NICs from their employees' wages and pay them to HMRC on their behalf. Here are key PAYE points to remember:
Sole traders must let HMRC know they’re an employer, before employing staff
They must set up a payroll system, to calculate PAYE tax and NICs correctly
When it's due, they must deduct the right amount of tax from employees
Records of staff payments and deductions must be kept for at least 3 years
Payslips should be provided to employees regularly, including tax information
Employers must submit PAYE records and provide P60 forms to employees
Complete your Self Assessment
As a sole trader, it is essential to complete an annual Self Assessment Tax Return and submit it to HM Revenue and Customs (HMRC). This process provides HMRC with accurate information about your income and expenses, ensuring you are taxed correctly.
When you register as a sole trader with HMRC, you will be automatically enrolled to complete the Self Assessment Tax Return each year. It's important to register on time to avoid penalties.
For self-employed individuals filing Self Assessment tax returns, here are the key filing deadlines:
31 October: Paper Filing Deadline
If you choose to file a paper tax return, it must be submitted by this date. Late filing penalties may apply even if you have no tax to pay.
30 December: Online Filing Deadline for PAYE Tax Collection
If you have employment or pension income and want HMRC to collect your self-employed tax through your PAYE tax code, you need to submit your tax return online by this date.
This option is available if you owe less than £3,000 and may apply for income over £30,000.
31 January: Online Filing Deadline and Balancing Payment Due
All tax returns filed online must be submitted by this date.
Again, late filing penalties apply if you miss this deadline, even if you have no tax to pay.
Your balancing payment of tax for the previous tax year is due at this time.
You may also have a payment on account for the following tax year due on this date.
31 January + 1 year: Deadline for Amendments
If you discover an error on your paper or online tax return, you can amend it up to 12 months after the 31 January deadline following the end of the tax year.
Learn more about how to fill out a Self Assessment for the first time with our handy one-stop guide.
Completing the Self Assessment is a vital responsibility for sole traders, and by following these guidelines and seeking professional assistance if needed, you can navigate this process successfully and fulfil your tax obligations.
What are payments on account?
Once your Self Assessment has been completed, it’s time to think about Payments on Account. Essentially, these are advance payments of Income Tax and Class 4 National Insurance Contributions (NICs) that certain individuals are required to make for future tax years.
Here are the key details to understand:
If your total Income Tax and Class 4 NICs amount to more than £1,000 or if you do not have tax deducted at source (tax on income before you receive it) on over 80% of your income, you will need to make payments on account.
These payments are due on two specific dates: 31st January and 31st July. By these deadlines, you are expected to make the necessary payments based on an estimate of your tax liability for the upcoming tax year.
Individuals who don't need to do a Payment on Account need to make the full payment of Income Tax and National Insurance by the Self Assessment tax return deadline (31 January following the end of the tax year).
Since the two Payments on Account are based on an estimated liability, there's a third payment required, which is called a balancing payment. This needs to be made by the Self Assessment tax return deadline (31 January following the end of the tax year).
For example, if the payments on account for the tax year (that ended on 5 April 2023) are due for payment on 31 January and 31 July 2023, this balancing payment would be payable on 31 January 2024. This makes sure you have paid the remaining account that is owed to HMRC.
It’s important to note that if the two payments on Accounts don't match the final tax liability, any overpayments can be repaid or set against future tax liabilities.
To ensure compliance and avoid penalties, it's crucial to accurately estimate your tax liability and make timely payments on account by the designated deadlines.
Consider VAT registration and tax
Value Added Tax (VAT) is an important consideration for sole traders, and understanding when and why to register for VAT is crucial. Here's what you need to know:
You are required to register for VAT if any of the following conditions apply to your business:
Your turnover exceeds £90,000 in a 12-month period.
You receive goods in the UK from the European Union (EU) with a value exceeding £90,000.
You anticipate surpassing the VAT threshold within a single 30-day period.
However, there are situations where registering for VAT can be advantageous, even if your turnover is below the threshold.
For instance, being VAT-registered can enhance your company's perceived size and credibility. Displaying a VAT registration number on your website can give the impression of a larger business.
VAT registration also allows you to reclaim VAT paid on business purchases, which can be financially beneficial. It's important to keep all relevant VAT information and records for a minimum of 6 years if you are registered for VAT.
Easy and intuitive bookkeeping software for sole traders
Ensuring and maintaining accurate bookkeeping for sole traders has never been easier than with QuickBooks. Our accessible and versatile accounting software for sole traders has been used by millions around the world to boost tax compliance.
Be prepared for Self Assessment
QuickBooks estimates the tax you owe to HMRC using your logged transactions. Less nasty shocks when you get your bill, and Self Assessment is a smoother process.
Claim back everything you deserve
Record expenses with smart categorisation tools, helping you claim back when it's time for Self Assessment. That means more money to spend on growing your business.
Sort invoices and receipts fast
Easily customise and track invoices, and send automatic reminders. Simplify receipts with innovative software – just snap receipts and categorise them as expenses, ready for tax.
Integrates with apps and payments
Connect QuickBooks with your bank to make payments more streamlined. Give customers more ways to pay you, and sync with other third-party apps you can access anywhere.
Easy-to-understand cash flow insights
See your financial data in one place, on one dashboard – no messy spreadsheets! Make better business decisions, based on seeing your cash flow and detailed financial data.
With a range of features, from expense tracking, to direct bank connections, to intuitive payroll controls, it will leave you in complete control over your finances.
QuickBooks is also fully Making Tax Digital-ready, allowing you to prepare your VAT returns in line with HMRC compliance. What’s more, it couldn’t be easier to set up; learn how you can do that here.
FAQs
Should sole traders use bookkeeping software?
Yes, bookkeeping software should be a consideration for sole traders. It can help save time by automating tasks, improving accuracy by reducing human error, and providing financial insights. It can also help you stay compliant with HMRC by keeping long-term records.
Do sole traders need an accountant?
If running the financial side of your business is complex and time-consuming, it may be worth hiring an accountant. They can help prepare your financial statements, help make decisions about your business, and advise you on current HMRC rules and regulations.
What taxes do I have to pay as a sole trader?
As a sole trader, you must pay various taxes to HMRC once you’re over a certain threshold. These may include income tax, National Insurance contributions, and VAT (if applicable). Depending on your type of business, there may be other taxes to pay.
What are the standard tasks involved in sole trader bookkeeping?
Some standard tasks for sole trader bookkeeping are recording expenses and income, preparing financial statements, and managing invoices. Sole traders must also consider paying staff (if applicable), budgeting and cash flow, and staying on top of HMRC taxes.
What is the difference between accounting and bookkeeping?
The key difference between bookkeeping and accounting is that bookkeeping mainly involves recording business transactions accurately. Accounting encompasses a broader process of analysing and summarising financial data to make business decisions.
The information on this website is provided free of charge and is intended to be helpful to a wide range of businesses. Because of its general nature the information cannot be taken as comprehensive and they do not constitute and should never be used as a substitute for legal, accounting, tax or professional advice. We cannot guarantee that the information applies to the individual circumstances of your business. Despite our best efforts it is possible that some information may be out of date. Any reliance you place on information found on this site or linked to on other websites will be at your own risk.
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