If you start working for yourself as a sole trader, one of the first things you need to sort out is how you’ll keep your accounts.
Thankfully, this doesn’t have to be complicated. For most small businesses, that means keeping a proper record of what comes in, what goes out, and keeping the paperwork that backs those figures up.
Unlike a limited company, a sole trader doesn’t have to prepare statutory annual accounts for Companies House. But HMRC can still ask to see the records behind the figures on your tax return, so it pays to get into a decent routine from the start.
Keep your business money separate if you can
There is no legal requirement for a sole trader to have a separate business bank account. You and the business are legally the same person, so you can use a personal account if your bank’s terms allow it.
That said, using one account for wages, supermarket shopping and business transactions can become a pain surprisingly quickly.
A separate account for your business makes it much easier to see what you’ve earned and spent, and saves you having to pick personal transactions out of your books later.
It also makes life easier if you use an accountant.
Spreadsheet or accounting software?
For a small business with a modest number of transactions, there is nothing wrong with using a spreadsheet. Plenty of sole traders still do.
You can record sales in one column, business costs in another, and keep copies of the invoices and receipts which support each entry. The downside is that you have to enter and check everything manually.
Accounting software does more of the work for you. Most packages can connect directly to your bank account, import transactions and help with invoicing, expenses and tax records. Some can also deal with VAT and Making Tax Digital submissions.
Whether you need that level of automation depends on the business. If you’re sending a handful of invoices each month, a spreadsheet may be all you need. If you’re processing hundreds of transactions, software quickly starts earning its keep.
We’ve compared the options in our guide to accounting software for sole traders, and also looked at accounting software versus spreadsheets.
Record your income and expenses properly
Your records need to show the income your business receives. That might include customer invoices, card payments, cash sales, bank transfers and payments received through online marketplaces.
One distinction worth getting right early on is turnover versus profit.
Turnover is the income the business generates before expenses are deducted. Profit is what’s left after you deduct allowable business costs.
Profit is the figure that normally forms the starting point for calculating your Income Tax and Class 4 National Insurance.
On the other side of the ledger are your business expenses. These can include things such as stock, materials, tools and equipment, insurance, advertising, accountancy fees, business travel, telephone costs and business bank charges.
Not everything you spend money on is tax deductible, of course. The expense generally needs to have been incurred for the purposes of the trade.
Our main guide to sole trader business expenses covers the rules in more detail. You may also be able to use simplified expenses for certain costs.
How your sole trader profits are taxed
For the 2026/27 tax year, the standard Personal Allowance is £12,570, assuming you’re entitled to the full allowance.
Income Tax is then charged according to your total taxable income and the tax bands which apply to you. Scottish taxpayers have different Income Tax bands.
Sole traders can also pay Class 4 National Insurance. For 2026/27, the rates are:
- 6% on profits between £12,570 and £50,270
- 2% on profits above £50,270
Class 2 National Insurance is no longer a compulsory charge for most self-employed people. If your profits are at least £7,105, you are normally treated as having paid Class 2 for National Insurance record purposes. Those with lower profits may be able to pay voluntarily.
For a fuller explanation, see our sole trader tax guide. You can also put your figures into our self-employed tax calculator.
Self Assessment and the £1,000 trading allowance
If your gross trading income is more than £1,000 during the tax year, you will normally need to tell HMRC about the business and complete Self Assessment.
The £1,000 figure comes from the trading allowance. If your gross trading income is £1,000 or less, you will not usually have to register for Self Assessment purely because of that income, although there are exceptions.
If you do need to register, the usual deadline is 5 October following the end of the tax year.
Online Self Assessment returns are normally due by 31 January, which is also when any balancing tax payment is usually due.
This is where keeping decent records throughout the year pays off. Trying to reconstruct twelve months of business activity from bank statements and old emails in January is nobody’s idea of fun.
Our Self Assessment guide goes through the filing rules and deadlines.
Watch out for payments on account
One thing that catches many newly self-employed people by surprise is payments on account.
Broadly, these are advance payments towards the following year’s Income Tax and Class 4 National Insurance bill. They normally apply if you owe more than £1,000 through Self Assessment and less than 80% of your tax has already been collected at source.
The instalments are usually due on 31 January and 31 July.
That first January bill can therefore be much larger than expected. You may be paying the balance for the tax year just ended at the same time as the first payment on account towards the next one.
They are not an extra tax, but they can certainly feel like one if you haven’t put enough cash aside.
Making Tax Digital has changed the bookkeeping rules
From 6 April 2026, some sole traders have to use Making Tax Digital for Income Tax.
It applies first to people whose qualifying income from self-employment and property was more than £50,000 on their 2024/25 tax return.
The threshold falls to more than £30,000 from April 2027 and more than £20,000 from April 2028.
The important point here is that the test is based on gross qualifying income before expenses, not profit.
If MTD applies to you, you’ll need compatible software to maintain the required digital records and send quarterly updates to HMRC.
We’ve covered the rules separately in our guide to Making Tax Digital for the self-employed.
Don’t forget VAT
VAT is a separate issue from Income Tax and Self Assessment.
You normally have to register if your taxable turnover goes above £90,000 over any rolling 12-month period. You must also register if you expect your taxable turnover to exceed £90,000 within the next 30 days.
The rolling nature of the threshold sometimes catches people out. You can’t simply look at the turnover in your accounting year and forget about it until next year.
Businesses below the threshold can also register voluntarily. Whether that’s worthwhile depends largely on the type of customers you deal with and how much VAT you incur on business costs.
See our VAT registration guide for the full rules.
How long should you keep your records?
For Self Assessment purposes, sole traders normally need to keep their business records for at least five years after the 31 January filing deadline for the relevant tax year.
So if a return has a filing deadline of 31 January 2027, you would normally keep the supporting records until at least the end of January 2032.
You don’t necessarily need boxes full of paper. Electronic copies are fine in many situations, provided they are complete, readable and can be produced if HMRC asks for them.
We have a separate guide explaining how long to keep tax and accounting records.
Do you need an accountant?
Not necessarily, especially if you’re running a very small business.
A sole trader with one source of income, straightforward expenses and reasonable bookkeeping skills may be perfectly comfortable doing their own accounts and Self Assessment.
An accountant becomes more worthwhile when the figures get complicated, you register for VAT, you have several sources of income, employ people, or simply decide that spending your own time on tax isn’t worth it.
Even if an accountant prepares the return, the quality of the job still depends on the records you give them. Handing over a tidy set of figures is usually cheaper than handing over twelve months of unexplained bank transactions.
If you are thinking about getting professional help, our guide to choosing an accountant as a sole trader is a good place to start.
The best accounting system is usually the simplest one that does everything your business actually needs. Set it up properly at the beginning, keep it reasonably current, and you avoid most of the grief later on.