Bookkeeping for Sole Traders: How to Create Records for your Tax Return

By Liam Cullen

29 January 2025

Partnerships

Sole Traders

Advice

6 mins

Table of contents

Bookkeeping might sound a bit daunting, but it’s really just about staying organised and on top of your financial records.

In this article we’ll break it all down in simple terms so you can feel confident about managing your business’s finances. You deserve it.

What is a sole trader?

A sole trader is someone who runs their own business and keeps all the profits for themselves. Legally speaking, the person and the business are the same thing, which means any business debts might affect your personal assets.

We go into more detail about the pros and cons of setting up as a sole trader in a separate article. In this one we’re here to talk about what tax records sole traders need to keep. Just to make that clear.

What records do sole traders need to keep for tax?

As a sole trader you’re responsible for making sure you keep track of all the transactions which happen in your business. Known as bookkeeping, it’s like having a financial diary for your business.

The type of information you need to record includes:

The details of any taxable income, such as sales invoices and receipts
Expenses relating to your business
How much VAT you pay (and charge, if you’re VAT registered)
Transfers or payments in your bank account and any other payment platforms you use, such as PayPal
Information about any grants or other funding and finance. For example, if you have a business loan, you’ll need to record the loan amount coming into the business, as well as accounting for the repayments.

Learn more about what records you must keep for your sole trader business

How long do I need to save information for?

HMRC recommend businesses keep their financial records for at least 5 years. It’s always a good idea to hang on to them anyway, just in case you need to refer back to them later. Especially if someone owes you money. Or HMRC ask to take a look.

How do I record my finances?

Some people prefer to keep paper records, but with Making Tax Digital (MTD) rolling out in stages HMRC encourage sole traders to record financial info digitally. The rules are already in place for VAT registered businesses. Some non-VAT sole traders will be affected from April 2026 onwards, when MTD Income Tax is expected to launch.

What can I use?

You could use spreadsheets or databases to keep digital records, and then submit this information to HMRC using bridging software.

Another option is to use accounting software which has a direct link to HMRC. It keeps everything together so you can submit your returns more easily. Our boss very politely asked us to mention we make accounting software which does this. Other providers are available.

Most decent options will include invoicing tools, bank feeds which import transactions directly from your bank account to minimise all the typing, and all sort of other timesaving, error-reducing, accuracy-improving features.

How do sole traders pay tax on their earnings?

Working for yourself as a sole trader means you’ll need to send a Self Assessment tax return to tell HMRC about all your earnings. The information you provide is used to work out how much tax you need to pay.

If you’ve never done this before, be sure to register in plenty of time! It can take a week or two for all the confirmation letters to come through.

Bookkeeping tips for sole traders

Here are a few top tips on sole trader bookkeeping:

Try not to put off your bookkeeping tasks until the end of the tax year. If you use accounting software, then it should include lots of automations which will reduce the admin work of keeping everything up to date.
Set aside money once you’ve been paid for each piece of work you do, so it’s there to pay your tax bill when you need it
Make any payments promptly to avoid hurting your cash flow later
Claim as many business expenses as you can to bring your tax bill down
Digitise your records, but don't toss those paper receipts just yet! Take photos and attach them to the bookkeeping record they relate to. It’ll make life much easier if your accountant has questions or if HMRC ask to see them
Use accounting software to make everything easier. The fact that telling you this is our actual job doesn’t stop it being true.

Do I need to use a business bank account?

You don’t legally have to have a separate bank account for your business if you’re a sole trader. That said, and depending on the nature of your business, it’s strongly recommended. This is mainly because it’s so much easier to create the financial records you need for your tax return if your personal and business expenses separate.

For example, you have a business with lots of transactions happening all the time, it’ll be far simpler to manage everything if this data is separate to your Netflix subscription and payments to the local takeaway.

This is especially true if you decide to use those bank feeds we mentioned earlier. These pull information from your bank account and store them as bookkeeping records, so you don’t need to type everything out.

Just remember that some banks will charge a fee for their business accounts which you’ll need to be aware of when looking around.

How do I record my expenses?

The good news is that, just like any other business structure, sole traders can claim expenses against their tax bill.

You’ll record these in the same way as any other transaction in your business – just make sure to categorise everything to help you make sense of it all later. This is particularly useful if you want to review the financial performance of your business.

Typical examples of sole trader expenses might include:

Office supplies like a work PC or laptop, office furniture and stationery
Travel, transport and accommodation costs that relate to your work, including fuel costs
Uniforms and essential workwear
Salaries, wages or money you give to any staff
Stock and other raw materials you need to run your business
Insurance and other financial costs including bank charges
Costs relating to your business premises like lighting, heating, water and business rates
Marketing costs, for example costs that relate to advertising or promotional activities or running your website
Any costs that relate to training your employee(s), for example course fees

Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.