How sole trader accounts work is one of those things that sounds complicated until someone explains it simply. You don’t need a finance degree to get this right, and by the end of this article you’ll know exactly what’s required of you and what’s optional.

What Sole Trader Accounts Actually Are

Your sole trader accounts are just a record of what money came in and what money went out. That’s the core of it. Everything else, the software, the spreadsheets, the tax return, builds on top of that one simple idea.

HMRC requires you to keep records of your business income and expenses so you can file a Self Assessment tax return each year. Self Assessment is the process where you tell HMRC what you earned, what you spent, and therefore what tax you owe. You must keep those records for at least five years after the 31 January deadline for the tax year they relate to.

What Records Do You Legally Need to Keep?

You need to keep a record of all the money your business receives, that’s your income, and all the money it spends to operate, those are your expenses. Expenses might include tools, materials, mileage, phone bills, software subscriptions, or a proportion of your home running costs if you work from home. You don’t need to use any particular system, but your records need to be accurate and available if HMRC asks.

A lot of sole traders I speak to are worried they’ve been doing this wrong because they’ve been using a personal bank account or keeping receipts in a folder. Honestly, neither of those things puts you in trouble automatically. What matters is that you can account for your income and expenses when it’s time to file. If you want to tighten things up from wherever you are now, a simple system goes a long way.

Do You Need Accounting Software or Will a Spreadsheet Do?

For simple sole traders, a spreadsheet can absolutely work. If you’re not VAT registered, don’t have employees, and your income comes from a handful of clients each month, a well-organised spreadsheet is a legitimate option. There’s no law that says you must use software.

That said, Making Tax Digital for Income Tax is being phased in, and it will eventually require most sole traders to use recognised software to keep digital records and send quarterly updates to HMRC. The threshold starts at £50,000 annual income from April 2026, dropping to £30,000 in 2027 and £20,000 in 2028. If you’re near or above those figures, now is a sensible time to move to software rather than scrambling later. I use Xero with my clients because it handles MTD submissions, keeps everything in one place, and doesn’t require you to understand accounting to use it day to day. If you’d like to know more about what’s involved, take a look at my sole trader accounts service page at https://acme-accounting.co.uk/services/sole-trader-accounts/.

The Key Deadlines You Need to Know

The main date to remember is 31 January. That’s the online filing deadline for your Self Assessment tax return and the deadline for paying any tax you owe. The tax year runs from 6 April to 5 April the following year, so your 2024-25 return covers 6 April 2024 to 5 April 2025 and is due by 31 January 2026.

If your income goes above the VAT registration threshold (currently £90,000), you’ll also need to register for VAT and file VAT returns, usually quarterly. Missing VAT deadlines carries penalties, so if you’re getting close to that threshold it’s worth keeping an eye on it. If you come under Making Tax Digital for Income Tax, you’ll also have quarterly updates to send to HMRC through your software, in addition to your annual return.