We’ve compiled answers to some of the most common questions that accountants are asked by
those who are sole traders.
If you have questions that are not answered below, we can help! Get in touch with us to find out
more.
What records do I need to keep as a sole trader?
As a sole trader, you’ll need to keep records of all financial transactions related to the business. This
means all invoices that you send out, records of when those invoices are paid and receipts for any
business expenses you have paid out. You’ll also need to keep PAYE records if you employ people.
Using a tool, such as software or a spreadsheet, to keep track of what is going out and coming into
the business financially is the day-to-day bookkeeping that will help you understand what position
your business is in at all times. Keeping this up to date is important.
If you’re not confident in doing bookkeeping yourself, you can hire a bookkeeper to do this for you.
Do I need a business bank account as a sole trader?
As a sole trader, you are not a separate legal entity to your business, so you are not legally required
to have a separate business bank account. However, some personal bank accounts have terms and
conditions that mean they cannot be used for business purposes and most sole traders find it much
easier to separate their personal and business finances.
For this reason, it’s usually wise to open a business bank account purely for business-related
transactions.
How much do I need to set aside for tax and National Insurance?
The amount of money that you’ll need to set aside for tax and National Insurance will depend on
how much profit you make (your turnover, minus any allowable business costs/expenses), as this will
determine your tax bracket.
As well as income tax, you’ll need to pay National Insurance contributions (NICs) if you earn over the
minimum threshold. The thresholds are reviewed annually so it’s important that you check that you
are using the correct information in any calculations you make.
As a rough rule of thumb, setting aside roughly 25- 30% of your profits is usually sufficient for those
earning between £12,570 and £50,000 over 12 months (2023/24 tax year). Those earning less than
£12,570 are under the threshold for paying income tax and NICs from the 2023/24 tax year onwards
as things currently stand.
As well as paying income tax and NICs on what you earned in the last tax year, you will also be asked
by HMRC to make two ‘payments on account’ (one on 31 st Jan, one on 31 st July), which is designed to
cover your tax and NICs for the coming year. These payments on account assume that you will earn
the same as you did in the previous tax year.
Do I repay my student loan as a sole trader?
If you have a student loan that you are currently repaying, you will continue to do so through self-
assessment if you earn over the current threshold. The thresholds are different, depending on what
plan type your student loan falls under e.g. Plan 1 or Plan 2, and are reviewed annually.
In the 2023/24 tax year, the threshold for Plan 1 is £22,015 and Plan 2 is £27,295. The amount you
repay is based on 9% of your earnings above the threshold, so this gives you an idea of what you’ll
need to set aside.
For example, a sole trader repaying a Plan 1 student loan and earning £40,000 profit in the tax year
2023/24 will need to repay just under £1619 under self-assessment. A sole trader repaying a Plan 2
student loan on the same income would need to repay just under £1144.
When your self-assessment tax return is submitted, your tax calculation will include student loan
repayments if applicable.
What are my legal financial responsibilities as a sole trader?
As a sole trader, you are legally obliged to:
• Register for self-assessment with HMRC, even if you think that you might not earn enough to
pay tax
• Keep records of business transactions and expenses
• Submit a self-assessment tax return every year
• Pay the taxes due
• Comply with VAT rules (if applicable – more on this below)
Do I need to register for VAT as a sole trader?
If your 12-month rolling turnover exceeds the threshold (currently £85,000), you must register for
VAT with HMRC and start charging your customers VAT once the registration is complete. The
threshold is based on turnover, not profit.
You will also need to start completing VAT returns.
What expenses can I claim as a sole trader?
There are different ways of managing expenses if you are a sole trader. These depend on whether
you do ‘traditional accounting’ and ‘cash basis accounting’ for your business accounts and whether
you choose to opt for ‘simplified expenses’.
You can find out more on the government website, including a list of what allowable expenses you
can claim back, which will reduce your tax liability.
Do I need an accountant as a sole trader?
It is possible to do your own accounts if you are a sole trader, but many prefer to get the expertise of
an experienced accountant involved instead, to make sure that no mistakes are made and to ensure
they are being as tax-efficient as possible.