Bookkeeping might not be the most glamorous part of running your business—but if you’re a sole trader, it’s one of the most important. Done well, it gives you control, confidence, and clarity. Done badly (or not at all), it leads to stress, fines, and missed opportunities.
This guide will walk you through what you need to know—from setting up systems to staying on top of your numbers.
Why Bookkeeping Matters
Bookkeeping is the process of recording your business’s income and expenses. But it’s more than just admin—it helps you:
- Track profitability
- Budget and plan ahead
- Understand what you owe in tax
- Claim the right expenses
- Avoid HMRC penalties
Whether you’re self-employed full-time or running a side hustle, good bookkeeping puts you in control.
Step 1: Keep Business and Personal Finances Separate
Even if you’re not legally required to have a business account, opening one is a smart move. It makes it far easier to track income and claim expenses accurately—without sifting through your Netflix and Tesco receipts.
Step 2: Choose a Bookkeeping Method
You’ve got options:
- Spreadsheets: Fine for simple setups, but easy to outgrow
- Accounting Software: Tools like Xero, QuickBooks, and FreeAgent make life easier, especially for invoicing, bank feeds, and tax filing
- Outsourcing: If your time is better spent elsewhere, hiring a bookkeeper might save you money in the long run
Whatever you choose, consistency is key.
Do be aware that Making Tax Digital for income tax is being phased in from April 2026, meaning that it will become a requirement to use accounting software. That means no more spreadsheets!
Step 3: Track All Income and Expenses
Log everything. You’ll need to know:
- What you earned (sales, commissions, freelance income, etc.)
- What you spent (materials, subscriptions, travel, etc.)
- When money came in and went out
This is especially important if you’re cash accounting, which most sole traders are.
Step 4: Understand Allowable Expenses
Claiming expenses reduces your tax bill—but only if they’re wholly and exclusively for business use. Common examples include:
- Office supplies
- Business travel (not commuting)
- Software subscriptions
- Marketing costs
- A portion of home office costs
If in doubt, get advice. Claiming the wrong thing can trigger penalties.
Step 5: Stay Organised with Receipts and Invoices
HMRC expects you to keep records for at least 5 years after the 31 January submission deadline for each tax year. Use digital tools (like Dext or your phone’s camera) to store receipts securely.
Step 6: Plan for Tax
Self-employed tax isn’t taken at source. That means you need to set aside money for:
- Income Tax
- Class 2 and Class 4 National Insurance
- Payments on account (which catch many people out)
A good rule of thumb is to set aside around 25–30% of your profits.
Step 7: File Your Self Assessment on Time
The deadline is 31 January each year. File late and you’ll face a £100 fine, rising over time. If you’re organised, it’s manageable. If you’re not, it becomes a scramble.
Bonus: Use Your Numbers to Grow
Bookkeeping isn’t just about compliance. It gives you insight into:
- Which clients or products are most profitable
- What your breakeven point is
- How sustainable your pricing and costs are
With this data, you can make better decisions and build a stronger business.
Bookkeeping might not be what you signed up for—but with the right tools, habits, and support, it doesn’t have to be a burden. In fact, it can be a powerful tool for making your business work better for you.
If you’re struggling with where to start, or just want to get it off your plate, get in touch—we help sole traders across the UK stay compliant, plan ahead, and keep more of what they earn.
