Updated 23 March 2022
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.
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.
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:
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:
Sole traders can claim business expenses to offset their tax bill in the same way companies do. To prevent people from claiming money back for things that aren’t used for business purposes, the government has set out the expenses it will allow. These are the self-employed business expenses currently on the list:
Just make sure you keep receipts of your business expenses because you will likely need proof for HMRC.
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).
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.