Setting up accounts if you’re self-employed – a beginner’s guide

If you decide to work for yourself and start a business as a sole trader (self-employed), you need to set up an accounting system to record your income and expenses.

You also need to find out how business profits are taxed, how to file your tax returns, and how to pay HMRC.

To help you get up to speed with your duties and responsibilities, read our guide to getting your accounts set up painlessly!

Updated for the 2025/26 tax year.

1. Open a separate bank account

A sole trader is not legally separate from their business, so a separate business bank account is not legally required. However, there are definite advantages to keeping your business and personal finances separate.

If you have only a personal bank account, you will need to be more explicit in your records and specify which expenses are personal and which are business-related.

This will affect how you record expenses and income and will require more time.

Having a separate business bank account makes it easy to record business expenses and income. This, in turn, will make completing your annual accounts and Self Assessment Tax Return (see below) less time-consuming.

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2. Know your tax and National Insurance rates

As a sole trader, you need to set aside money to pay income tax and National Insurance on your annual profits.

Make sure you know the current income tax and National Insurance Contributions (NICs) rates.

Income tax

Each individual receives a Personal Allowance each tax year, which is free of tax (if you’re entitled to the full allowance).

The standard Personal Allowance for the tax year 2025/26 is £12,570.

For income above the Personal Allowance, you will be taxed at the following levels:

• The Basic Income Tax rate of 20% on any income up to £50,270
• The Higher Income Tax rate of 40% on any income between £50,271 and £125,140
• The Additional Income Tax rate of 45% on any income over £125,140.

National insurance

The self-employed also pay Class 4 NICs.

Class 4 NICs are paid to HMRC via Self Assessment.

From 6 April 2024, Class 2 NICs were abolished for most self-employed people, although you can still choose to pay Class 2 voluntarily to protect your State Pension record if you do not qualify through profits.

You pay Class 4 if profits are above the threshold for the tax year (8% on profits between £12,570 and £50,270 and 2% on profits over £50,270 for 2025/26).

You can find more details on tax and NI for the self-employed here:

• Sole Trader Tax – A guide for start-ups and the newly self-employed
• Guide to National Insurance Contributions (NICs)
• Sole trader income tax and NI calculator

3. Bookkeeping

Compared with a limited company, the bookkeeping required as a sole trader is minimal.

You should track your monthly income and expenditure. To do so, keep records of all your invoices and receipts.

You should keep receipts for all work-related transactions, as well as for rent and bills.

If you own an office, or if you work from home, you may be able to claim rent and bills back from HMRC as a business expense.

Spreadsheets

A spreadsheet for recording your business transactions is a good solution for some, but the functionality may be limited.

Spreadsheets work best for those who want to record transactions by inputting data themselves and for those who prefer to send their own invoices.

Bookkeeping software

More and more business owners use bookkeeping software or an online accounting package to record their business expenses and income.

Online accounting software is increasingly popular with small businesses, offering features such as invoice creation and automatic bank feed.

You can even file tax returns (self assessment and VAT) directly from the software.

These features eliminate duplication, saving valuable time.

There are many options available, including FreeAgent, Xero, and ClearBooks.

Here’s a useful official HMRC guide to keeping business records if you’re self-employed.

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Both platforms are fully compatible with Making Tax Digital for Income Tax, which begins in April 2026.

4. Claim business expenses

As a sole trader, there will be a number of business expenses you can offset against your business profits, including:

• Cost of stock
• Equipment
• Advertising
• Delivery charges
• Heating and lighting in your business premises
• Office rent
• Postage
• Stationery
• Books and magazines related to your work
• Bank charges on your business account
• Telephone use
• Travel

Expenses you can not claim include:

• Parking fines and speeding tickets
• Childcare
• Client entertainment
• School fees
• Gym membership
• Hairdressing costs
• Training courses that are not related to your job

If you’re self-employed and working from home, some of your household expenses may also be tax-deductible.

You can find out more about how sole traders could pay less tax in these guides;

• Could you cut your tax bill by claiming some of these business expenses?
• How using ‘simplified expenses’ can save you time if you’re self employed

5. Complete a Self Assessment Tax Return

You have to complete an annual self assessment tax return to HMRC if you’re self-employed.

Your tax return provides HMRC with information on your income and expenses and ensures you pay the correct amount of tax on your profits.

When you register as a sole trader with HMRC, you are automatically enrolled into the self assessment process.

If you don’t register in time, you may be charged a penalty.

Completing your Self Assessment is easier when you have detailed, clear business records.

This is made far easier if you use online accounting software. And if you’re required to comply with MTD for Income Tax after April 2026, you must keep digital tax records.

If you aren’t confident you can do your self-assessment without making any mistakes, then consider hiring an accountant (see below).

Read our self assessment guide.

6. Payments on account

Payments on account are advance payments of Income Tax and Class 4 NICs that some have to pay for a future tax year.

You will have to make a payment on account if:

• Your Income Tax and Class 4 NICs total more than £1,000
• You don’t pay tax at source (tax on income before you receive the payment) on more than 80% of your income

Payments on account are due on 31^st January and 31^st July.

7. Register for VAT if necessary

You must register for VAT if:

• Your turnover is more than £90,000 over a 12 month period
• You receive goods in the UK from the EU with a value in excess of £90,000
• You expect to go over the VAT threshold in a single 30 day period.

However, registering for VAT can be advisable in certain circumstances, even if your turnover falls below the compulsory registration threshold.

For example, being VAT registered may give customers the perception that you are a larger business. You can display your VAT registration number on your company documentation and website.

Being VAT registered will also allow you to recover any VAT you pay on business purchases.

If you’re registered for VAT, you must keep all your accounting records for 6 years.

8. Hire an accountant if you need a hand

If you can easily handle the self assessment process, and your business is fairly uncomplicated, you should have no trouble keeping on top of your accounts – especially if you follow the steps we’ve included in this guide.

However, many small business owners hire an accountant to handle their accounting and tax affairs.

An accountant is particularly useful if your tax affairs are more complicated, or if you have a lot of different accounting entries in your annual accounts.

You might just like to use an accountant to help at self assessment time. Or to provide peace of mind that a professional is looking after your tax affairs while you get on with running your business.

Try these handy guides for some more tips.

• Do you need a bookkeeper or an accountant?
• 15 things to ask when you hire an accountant
• Our growing list of small business accountants

This advice was written exclusively for ByteStart by Lauren Wise from The Accountancy Partnership. The article has been since updated by the Bytestart team with 2025/26 tax data.