1. What Are Sole Trader Accounts?
Sole trader accounts refer to the financial records a self-employed individual keeps to report business income, expenses, and profit. These are used to calculate your tax liability when filing a Self Assessment tax return with HMRC.
2. Do Sole Traders Need to File Full Accounts?
Unlike limited companies, sole traders are not legally required to file full statutory accounts. However, they must maintain accurate records and submit a Self Assessment tax return annually.
3. What Should Be Included in Sole Trader Accounts?
- Sales/income records (invoices, receipts)
- Business expenses (rent, utilities, materials, travel)
- Bank statements (preferably from a dedicated business account)
- Cash transactions records
- Mileage and vehicle use (if claimed)
- Stock or inventory records
- VAT records (if registered)
4. Sole Trader vs Limited Company Accounts
| Feature | Sole Trader | Limited Company |
|---|---|---|
| Legal Entity | Not separate from the owner | Separate legal entity |
| Accounting Requirements | Simplified | Full statutory accounts |
| Tax Filing | Self Assessment | Corporation Tax + Annual Accounts |
| Public Disclosure | Not required | Required via Companies House |
5. How to Prepare Sole Trader Accounts
- Keep daily records of income and expenses
- Use accounting software like QuickBooks, Xero, or FreeAgent
- Organise receipts and invoices digitally or physically
- Reconcile bank transactions monthly
- Create a basic profit and loss statement (P&L)
6. Self Assessment and Tax Filing
Every sole trader must file a Self Assessment tax return annually by:
- 31 October (paper return)
- 31 January (online return)
You’ll pay:
- Income Tax on profits
- Class 2 and Class 4 National Insurance (based on earnings)
7. Do I Need an Accountant as a Sole Trader?
Not necessarily, but it can help. Many sole traders manage their accounts independently with software, especially if their finances are simple. An accountant is useful for:
- Tax efficiency
- Complex deductions
- Avoiding penalties
8. Tips for Managing Sole Trader Accounts
- Open a separate bank account for your business
- Track income and expenses weekly
- Set aside money for tax (20–30% of profits)
- Store receipts for at least 5 years
- Use mobile apps for on-the-go expense tracking
9. Can I Claim Business Expenses?
Yes. Common allowable expenses include:
- Office supplies
- Phone and internet
- Travel and fuel
- Professional services
- Marketing and advertising
These reduce your taxable profit and must be supported with documentation.
10. HMRC Requirements for Record Keeping
HMRC requires sole traders to:
- Keep records for at least 5 years
- Provide evidence of income and expenses if requested
- Use Making Tax Digital (MTD) software if VAT-registered and over the threshold
Frequently Asked Questions
Do sole traders need a business bank account?
It’s not legally required but strongly recommended for clean financial records.
Can I use spreadsheets to manage sole trader accounts?
Yes, especially for simple accounts. However, accounting software is more efficient and helps with tax calculations.
What happens if I don’t keep proper accounts?
You may face HMRC penalties, overpay tax, or miss allowable deductions.
When should a sole trader hire an accountant?
If your business grows, tax affairs become complex, or you want peace of mind.
Is VAT registration mandatory for sole traders?
Only if your taxable turnover exceeds £90,000 (as of 2025). You can also register voluntarily.
Can I switch from sole trader to limited company later?
Yes. Many entrepreneurs start as sole traders and incorporate later as they scale.
Conclusion
Managing sole trader accounts is simpler than corporate accounting, but still vital for tax compliance and financial health. By keeping detailed records, using the right tools, and understanding HMRC rules, you can stay organised and focus on growing your business with confidence.