How sole trader accounting works is one of those things nobody really explains properly — you just find yourself self-employed one day and expected to know it already. Let me go through it clearly, without the jargon.

What Records Do You Actually Need to Keep?

As a sole trader, HMRC requires you to keep records of all your business income and expenses so you can complete your Self Assessment tax return accurately. That means every invoice you raise, every business purchase you make, and any other money moving in or out of your business. It doesn’t have to be complicated — a spreadsheet works fine if it’s kept up to date.

The part people miss is how long those records need to stay. You’re required to keep them for at least five years after the 31 January submission deadline for that tax year. So your 2024/25 records need to be kept until at least January 2031. That’s worth knowing before you hit delete.

How Tax Actually Works When You’re Self-Employed

As a sole trader, you pay Income Tax and National Insurance on your profits — that’s your income minus your allowable business expenses. The important word there is profits, not turnover. If you brought in £40,000 but spent £8,000 on genuine business costs, HMRC taxes you on £32,000, not £40,000.

You report all of this through a Self Assessment tax return, which covers each tax year running from 6 April to 5 April the following year. The filing deadline is 31 January online, with payment due the same day. Miss that, and you’re looking at an automatic £100 fine — with interest added on top the longer you leave it.

What Can You Actually Claim as an Expense?

The rule HMRC uses is simple in theory: an expense must be wholly and exclusively for the purpose of your business. In practice, this covers things like equipment, software, professional subscriptions, travel to client sites, a portion of your phone bill, and any training directly related to your trade. If something is partly personal and partly business, only the business portion is claimable.

One area people consistently miss is the use of home as an office. If you work from home, you can claim a proportion of costs like heating, electricity and broadband. HMRC has a simplified flat-rate method if you don’t want to work out the exact split. Either way, it’s money you’re entitled to claim — and not claiming it means paying more tax than you need to.

Making Tax Digital: What’s Changing for Sole Traders

From 6 April 2026, sole traders with total annual income over £50,000 must use Making Tax Digital for Income Tax. That means digital record-keeping and sending quarterly updates to HMRC through compatible software, instead of one annual return. You’ll also get in-year estimates of your tax bill, which genuinely helps with planning.

This isn’t a reason to panic. But if you’re currently earning above that threshold and still managing things on paper or a basic spreadsheet, it’s worth getting your setup sorted now rather than rushing at the last minute. Most sole traders I work with find the quarterly process less stressful than the annual scramble once they’re in the habit.