Sole traders generally work by themselves and therefore, they usually manage the sole trader accounting themselves. Some sole traders engage an accountant to complete this for them, however many discover that their finances can be managed by themselves.
Technically, “sole trader” is a term used to describe a business structure which is subject to certain tax laws. This is why it’s crucial to learn the best ways to keep financial records for sole traders.
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Key Takeaways
- The term “sole trader” refers to a self-employed person who receives their income from business.
- Sole traders have to pay tax on their incomes and file self-assessments.
- Sole traders are equally susceptible to Making Tax Digital as any other business.
- A sole trader has to pay National Insurance Class 2 and 4 National Insurance. 4 National Insurance alongside income tax.
- It is crucial that sole proprietors maintain accurate financial records of all expenses for their business.
Who are Sole Traders?
The term “sole trader” refers to an self-employed person who is able to collect all of their earnings. A self-employed individual who shares their earnings with the business partner isn’t an individual who is a sole trader. In general, the term “sole trader’ is a reference to a specific business structure, while self-employed is a reference to the method you pay taxes.
It is surprising to learn that certain sole traders employ employees, just as small businesses. It doesn’t change your tax situation as a sole trader. Some may, however, be eligible to claim payments from employees in the form of business costs.
You can claim yourself as sole trader if you earn over £1,000 on the self-employed work you do in tax year. A lot of people declare themselves sole traders prior to reaching the £1,000 threshold. This is because sole traders come with advantages, like tax-free childcare.
Responsibilities of a Sole Trader
A sole trader has to complete and submit self-assessment tax returns at the close of each tax year. If you’ve not previously done this then you should sign up for a self-assessment tax return through the official site within 20 days before the deadline for filing your taxes.
Each sole trader is required to be liable for income tax on any earnings. For private or public limited companies, tax on income is automatically taken out of the pay of employees. A sole trader, however, has to pay the tax by hand.
Additionally, you must pay Class 2 and 4 National Insurance. 4 National Insurance within three months after becoming self-employed. There is a chance that you do not need the obligation to cover both. You must be able to pay class 2 when your annual earnings exceed £6,475 and Class 4 if your income is over £9,501.
A sole trader is also required to apply for VAT registration in the event of a turnover of more than £85,000 or if they wish to reclaim VAT from transactions made to VAT-registered companies.
Record Keeping for Sole Traders
Whatever way you manage your business, you must file certain paperwork with the HMRC. At a minimum, you need to be able to keep:
- All records pertaining to taxable income
- VAT records (if relevant)
- Documentation of any grants made by or through the Self-Employment Income Support Scheme (SEISS)
- Records of your business bank (if there is a distinct bank for business account, you can access your documents from there)
- Receipts for all business-related expenses
The HMRC suggests that businesses save all financial documents for the upcoming five years. This is also applicable to those who are self-employed.
Paper documents aren’t required by HMRC. Actually, it’s better to eliminate the paper records. As Making Tax Digital (MTD) comes out, it’s recommended to make the transition to the digital system. It’s also easier to keep all your documents organised using accounting software.
When choosing a sole trader accounting software it’s tempting to select the least expensive option. However, the most affordable software may not be the most efficient software for accounting. You require a program that is MTD-compliant and able to manage the fluctuating income. FreshBooks can do both. Furthermore, you’ll require an accountant online. In collaboration with Mazuma, FreshBooks provides sole traders in the UK with online accounting services.
How Will Making Tax Digital Affect Sole Traders?
Making Tax Digital is a UK government initiative that aims to make tax payments easier and more precise. Software for accounting is more vulnerable to errors made by humans in comparison to paper records. This means that the HMRC would prefer business owners to begin filing tax returns electronically.
VAT-registered sole traders already under the control of MTD. In April 2026, MTD extended to all businesses except for those who are exempt. As a sole-trader it is mandatory to use MTD-compliant software, just like every other business.
Be aware that the launch of MTD will also mean that your annual self-assessment procedure will end. Instead, you’ll have to file your self-assessment tax returns on an annual schedule.
In the overall plan of the universe, MTD will make things easier for sole traders. The digital bookkeeping system and tax payment will cut down time and eliminate errors. Keep in mind this MTD for ITSA is only applicable to sole traders who earn more than PS50,000 in a year.
Bookkeeping Tips for a Sole Trader
A separate bank account is not legally required. Some prefer it because they can keep their personal expenses separated. Be aware that certain banks may charge you extra fees for opening a second bank account.
It’s easier and less expensive to follow the best practices for bookkeeping when it is possible to keep personal earnings and expenses in a separate account. Here are a few top suggestions for bookkeeping for sole traders.
- Do not leave your bookkeeping duties until the close of the year’s tax filing.
- At 30 percent of your earnings to pay for National Insurance.
- If you’re mixing freelance work with permanent employment make sure you don’t make payments to National Insurance twice.
- Take advantage of as many business expenses as you can. Everything from stock to internet bills, uniforms can be eligible.
- Digitise your records, but hang the receipts you’ve printed on. They can be helpful as backup documents. If you’re ever audited by HMRC You’ll need these documents to demonstrate the amount of expenses you incurred.
- Do not delay payment: putting off payments today will result in the possibility of debt in the future. This could affect your cash flow.
- Make use of Accounting software that makes your life more efficient.
- There’s nothing wrong with talking to a professional accountant when you’re overwhelmed.
Improve your efficiency and concentrate on the core business tasks by working in a virtual accountant close to your location.
Conclusion
Bookkeeping for sole traders isn’t too different from bookkeeping for other small-sized companies. Everyone who earns money must monitor their finances and submit tax returns. The most notable difference is merely the need to self-assess and the probability of business owners performing their bookkeeping on their own.