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The Complete Sole Trader Accounting Guide
- Jessica Barnett
- 6 days ago
- 8 min read
Tax, Bookkeeping, VAT & More | 2026/27
Running your own business is exciting — but keeping on top of the numbers? That’s where things can get complicated. Whether you’ve just gone self-employed or you’ve been trading for years, this guide covers everything you need to know about sole trader accounting.
At Barnett & Co Accountants in Crewe, we work with sole traders across Cheshire every day, helping them stay compliant, pay the right amount of tax, and actually understand their finances.
1.What Is a Sole Trader?
A sole trader is the simplest form of self-employment. You run your business as an individual — there’s no legal separation between you and the business. That means you keep all the profits, but you’re also personally responsible for any debts.
You don’t need to register a company at Companies House. You just need to register for Self Assessment with HMRC and keep records of your income and expenses.
Quick fact: You must register as self-employed with HMRC by 5 October in your second year of trading. If you started trading in the 2025/26 tax year, you must register by 5 October 2026. |
2. Bookkeeping Basics for Sole Traders
Good bookkeeping isn’t just about staying legal — it helps you understand how your business is really doing. At a minimum, you need to track:
All income received (sales, invoices paid, cash received)
All business expenses (costs wholly and exclusively for the business)
Bank statements reconciled against your records
Invoices you’ve raised and bills you’ve paid
HMRC requires you to keep records for at least five years after the 31 January Self Assessment deadline for the relevant tax year.
Paper vs. Software
Many sole traders start with a spreadsheet, which is fine. But as you grow, accounting software makes life significantly easier — and from April 2026, it’s a legal requirement for those earning over £50,000. We’re Xero Certified Advisors and also work with Sage, QuickBooks, FreeAgent, and Capium — all MTD-compatible.
Making Tax Digital (MTD) — Now Live: From 6 April 2026, MTD for Income Tax is mandatory for sole traders with gross income over £50,000. You must keep digital records and submit quarterly updates to HMRC via compatible software. Quarterly deadlines fall on 7 August, 7 November, 7 February, and 7 May. The threshold drops to £30,000 from April 2027, and £20,000 from April 2028. If you’re in scope and not yet set up, get in touch with us now. |
3. Understanding Self Assessment
As a sole trader, you pay tax through Self Assessment rather than PAYE. This means you’re responsible for reporting your income and expenses to HMRC each year and paying the tax you owe.
Key Dates
Date | Deadline |
5 April | End of the tax year |
31 July | Second payment on account (if applicable) |
5 October | Register for Self Assessment (new traders) |
31 October | Paper Self Assessment deadline |
31 January | Online Self Assessment deadline & payment due |
What Do You Pay Tax On?
You pay Income Tax and National Insurance on your profits — that’s your income minus your allowable business expenses. You don’t pay tax on your turnover.
Tax Year 2026/27 | Rate |
Personal Allowance (up to £12,570) | 0% |
Basic Rate (£12,571 – £50,270) | 20% |
Higher Rate (£50,271 – £125,140) | 40% |
Additional Rate (above £125,140) | 45% |
On top of Income Tax, you’ll pay Class 4 National Insurance at 6% on profits between £12,570 and £50,270, and 2% above that. Class 2 NI was abolished from April 2024.
Payments on Account
If your tax bill is over £1,000, HMRC will ask you to make advance payments (called payments on account) towards the following year’s bill. Each payment is 50% of the previous year’s tax liability, due in January and July. This catches many sole traders off guard in their first year — it’s something we always flag to our clients early.
4. Allowable Business Expenses
Claiming the right expenses reduces your taxable profit and ultimately your tax bill. HMRC allows expenses that are “wholly and exclusively” for business purposes.
Common Allowable Expenses
Office costs — stationery, postage, printer ink, software subscriptions
Travel — fuel, train fares, parking (not commuting to a regular place of work)
Marketing — website costs, advertising, business cards
Professional fees — accountancy, legal advice, insurance
Staff costs — wages, subcontractor fees, NI contributions
Stock and materials — goods bought for resale or use in your trade
Bank charges — business account fees and interest
Training — courses directly relevant to your current trade
Use of home as office — a proportion of household costs if you work from home
Use of Home
If you work from home, you can claim HMRC’s simplified flat rate or calculate an actual proportion of your household bills. The flat rate is tiered by hours worked per month: £10/month for 25–50 hours, £18/month for 51–100 hours, and £26/month for over 100 hours.
Capital Allowances
If you buy equipment for the business — a laptop, tools, machinery, a van — you may be able to claim the Annual Investment Allowance (AIA), which lets you deduct 100% of the cost in the year of purchase, up to £1 million.
5. VAT: Do You Need to Register?
You must register for VAT once your taxable turnover exceeds £90,000 in any rolling 12-month period. You can also register voluntarily if it benefits your business.
⚠️ Watch this space: The government has signalled that the VAT registration threshold may be reduced from April 2026 — potentially to around £60,000–£70,000. No formal change has been legislated yet, but if you’re trading close to the current threshold, now is a good time to review your position. |
Main VAT Schemes for Sole Traders
Scheme | Best For |
Standard VAT | Most businesses — claim VAT back on purchases |
Flat Rate Scheme (FRS) | Low-expense businesses — pay a fixed % of turnover |
Cash Accounting | Businesses with slow-paying clients — pay VAT when received |
Annual Accounting | Prefer one VAT return per year instead of quarterly |
The Flat Rate Scheme in particular can save certain sole traders a meaningful amount each year — we assess this for all our VAT-eligible clients as part of our onboarding process.
VAT Returns
Once registered, you’ll submit VAT returns (usually quarterly) via HMRC’s Making Tax Digital portal. You must use MTD-compatible software — another reason to get your bookkeeping set up properly from the start.
6. National Insurance for Sole Traders
From April 2024, Class 2 NI was abolished. Sole traders now only pay:
Class 4 NI: 6% on profits between £12,570 and £50,270; 2% above that
Your NI contributions are calculated automatically as part of your Self Assessment return. You still build up entitlement to the State Pension and certain benefits through Class 4 contributions.
7. Do I Need an Accountant?
Technically, no. But there’s a difference between what’s legally required and what’s actually in your best interest.
A good accountant will:
Ensure your tax return is accurate and filed on time (avoiding penalties)
Identify expenses and reliefs you might have missed
Help you plan ahead so you’re never caught short by a tax bill
Advise on the right VAT scheme, whether to incorporate, and how to grow efficiently
Give you time back to focus on what you actually do
At Barnett & Co, our sole trader packages are fixed-fee and transparent — no surprise bills, no jargon. Self Assessment starts from just £200, Bookkeeping from £55/month, and VAT Returns from £200.
Ready to take the stress out of your accounts? We work with sole traders across Crewe, Nantwich, Sandbach, and the wider Cheshire area. Fixed fees. Plain English. Real support. |
8. Common Sole Trader Accounting Mistakes to Avoid
Missing the Self Assessment deadline — the automatic penalty is £100, even if you have no tax to pay
Not saving for your tax bill — set aside 20–30% of your profits throughout the year
Mixing personal and business finances — open a dedicated business bank account
Forgetting payments on account — these can double your first-year tax bill unexpectedly
Under-claiming expenses — especially home working costs, mileage, and professional fees
Ignoring VAT thresholds — breaching the threshold without registering leads to backdated VAT liability
Summary
Running as a sole trader gives you flexibility and simplicity, but it does come with real accounting responsibilities. Get your bookkeeping in order from day one, understand what you can claim, know your key deadlines, and take professional advice when you need it — it almost always pays for itself.
If you’re based in Crewe or across Cheshire and want straightforward, fixed-fee accounting support, we’d love to hear from you.
Frequently Asked Questions
Do I need to register as self-employed straight away?
You must register with HMRC by 5 October in the tax year after you start trading. For example, if you started in the 2025/26 tax year, your deadline is 5 October 2026. Registering late can result in a penalty, so it’s best to do it as soon as you begin earning.
How much can I earn before I pay tax as a sole trader?
You can earn up to £12,570 (the Personal Allowance) before paying Income Tax. However, you also have the £1,000 trading allowance — if your gross income is below this, you don’t need to register for Self Assessment at all. Once your profits exceed £12,570, Income Tax applies at 20% up to £50,270, then 40% above that.
What records do I need to keep as a sole trader?
You must keep records of all income and business expenses, including invoices, receipts, bank statements, and mileage logs if you use a vehicle for work. HMRC requires you to retain these for at least five years after the 31 January filing deadline for the relevant tax year.
Can I claim expenses if I work from home?
Yes. You can either use HMRC’s simplified flat rate (tiered by hours worked: £10, £18, or £26 per month depending on hours) or calculate the actual business proportion of your household costs such as broadband, heating, and electricity. We can help you work out which gives you the bigger deduction.
Do I need to register for VAT?
Only once your taxable turnover exceeds £90,000 in any rolling 12-month period. Below this threshold, registration is optional — though voluntary registration can be beneficial if most of your clients are VAT-registered businesses. Note that the threshold may change from April 2026, so it’s worth keeping an eye on your turnover even if you’re currently below it.
What is Making Tax Digital and does it affect me?
Making Tax Digital (MTD) for Income Tax is now mandatory from 6 April 2026 for sole traders with gross income over £50,000. Instead of one annual Self Assessment return, you’ll need to submit quarterly updates to HMRC using compatible software. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028. If you’re not yet set up, we can help you get MTD-ready.
What's the difference between turnover and profit?
Turnover is your total income before any deductions — everything your business brings in. Profit is what’s left after you’ve subtracted your allowable business expenses. You pay Income Tax and National Insurance on your profit, not your turnover, which is why claiming the right expenses matters.
Do I need to pay National Insurance as a sole trader?
Yes. Class 2 NI was abolished in April 2024, so you now only pay Class 4 NI — at 6% on profits between £12,570 and £50,270, and 2% above that. This is calculated through your Self Assessment return and still counts towards your State Pension entitlement.
What happens if I miss the Self Assessment deadline?
HMRC issues an automatic £100 penalty the moment the 31 January deadline is missed — even if you owe no tax. Further penalties apply at 3 months, 6 months, and 12 months. Interest also accrues on any unpaid tax from the deadline date. Filing on time is always the cheaper option.
Is it worth using an accountant as a sole trader?
For many sole traders, the answer is yes — a good accountant will typically save you more than their fee through correct expense claims, tax planning, and avoiding penalties. At Barnett & Co, our fixed-fee sole trader packages start from £200 for Self Assessment, with no hidden charges and no jargon.
Barnett & Co Accountants | Electra House, Electra Way, Crewe, CW1 6GL | IAB Affiliated | Xero Certified Advisor
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