What accounts do I need to keep as a sole trader?

What does sole trader mean?

As a sole trader, you need to keep business accounts just like any type of business.

Contrary to popular belief, being a sole trader doesn’t necessarily mean you work on your own (though you might) or that you don’t have employees (though you might not).

Some sole traders may employ dozens of staff and superficially resemble companies.

‘Sole trader’ is simply a description of the structure of your business for tax purposes, and hence the type of accounts you must keep.

Sole trader is often referred to as being ‘self-employed’ (though that term can also apply to single-person companies).

Here’s a guide to accounting under the sole trader business structure.

Why is it important to keep accounts as a sole trader?

As a sole trader, you need to work out how much tax you owe each year.

Having a clear picture of your income and expenditure will make this much easier.

Because you won’t have your tax deducted monthly through a PAYE system, keeping track of your accounts also stops you from accidentally eating into the money you need to pay HMRC come 31 January.

In general, it’s helpful to see how much you’re spending and generating when you’re self-employed.

With everything laid out, you can identify opportunities to increase your profit margin – by changing your supplier or increasing the cost of some products or services, for example. 

What accounts do I need to keep as a sole trader?

By law, you need to keep a record of your income and expenditure and keep hold of these for five years from each 31st January tax submission date.

It’s vital that you have them ready for HMRC if they’re requested. Here are all the records you should keep:

• Business income – All the income you receive for your services and sales as a sole trader
• Personal income – Any income you get from other sources, like property and investments, which may affect the tax you pay
• Expenditure – Payments for the things you need to run your business effectively
• VAT records – If your turnover is more than the VAT threshold, you’ll need to register for VAT and hold records for at least six years
• PAYE records – Sole traders can employ people without becoming limited companies, and you’ll need to keep a record of wages through HMRC’s PAYE system
• Grants – Any amounts you receive from grants

What taxes will I pay as a sole trader?

Sole traders pay taxes in the same way as employees do.

You need to calculate them through HMRC’s self-assessment tax return and pay them yourself by the 31 January following the end of the tax year.

The taxes sole traders must pay include:

• Income tax on your net profit.
• National Insurance contributions: If your profits are £6,725 or more a year, Class 2 contributions are treated as having been paid to protect your National Insurance record. This means you do not have to pay Class 2 contributions. If your profits are more than £12,570 a year, you must pay Class 4 contributions.
• VAT (if your turnover is more than the threshold for the tax year)

What expenses can I claim as a sole trader?

Sole traders can claim business expenses to offset their tax bill like companies do.

The government has set out the expenses it will allow to prevent people from claiming money back for things that aren’t used for business purposes.

These are the self-employed business expenses currently on the list:

• Stock – goods that you’re selling on, or materials you need to produce goods
• Office, property and equipment – rent, insurance, stationary, computer software etc.
• Business premises – rent, bills, insurance etc.
• Marketing and subscriptions – website costs, advertising, trade membership and others
• Travel – fuel, parking, insurance and other transport costs specifically for business needs
• Clothing – uniforms, protective clothing and costumes for actors
• Training courses – those related to your business, not for ‘starting a business’, for example
• Legal and financial costs – solicitor, surveyor and accountant costs, but only for your business and not for help if you break the law
• Staff expenses – staff pay, NI contributions, pensions, training, benefits and pay for subcontractors

Remember to keep receipts of your business expenses because you will likely need proof for HMRC.

Should I open a separate business bank account?

As a sole trader, you and your business are considered one and the same for tax and legal purposes.

It’s not a legal requirement to open a separate business bank account when you’re a sole trader, but it is a very good idea.

Trying to separate your business costs from your personal ones can quickly get messy if all your payments are from one account, making it far more difficult to keep your records. Plus, you might not want to give your personal account details to your customers.

Some banks charge you to have special business accounts, but they often come with useful features for issuing invoices, creating your tax return and managing payroll (if you employ staff).

Do I need an accountant as a sole trader to help prepare my tax return?

Getting an accountant to take care of your tax return is sensible, especially if you’re not much of a numbers person or if you are very busy.

All you’ll need to do is send them the records of your incomings and outgoings, and they’ll do the hard work for you.

Getting a professional to do your tax return means you’ll have peace of mind that you won’t get in trouble with HMRC.

Just make sure you keep your invoices and receipts filed away safely for proof should you need it.

The cost of using an accountant can be claimed as a business expense, and they’ll make sure their services are covered on your tax return.

Get expert financial advice

Maintaining accurate and organised accounts as a sole trader is essential for managing your tax obligations and maximising your business's profitability.

By keeping thorough records and understanding the specific requirements for sole traders, you can ensure your business runs smoothly and complies with HMRC regulations.

Unbiased will match you with a financial adviser who offers specialised financial advice for sole traders, helping you navigate your unique business and tax needs.