Common sole trader accounting challenges and how to overcome them

We’ve seen some sole trader accounting problems in our time as business advisers — sometimes, they’re simply unavoidable. But other times, they can be prevented earlier.

Being self-employed gives you lots of freedom — you’re your own boss, dictating when and where you do business. But at the same time, there’s a lot on your plate, and it’s not always easy to stay on top of your finances while managing the rest of your business.

Some sole traders simply learn the hard way, running into accounting challenges early on and changing their methods from there onwards. But if you don’t want to waste precious time (and money), guidance from an expert is the better route.

In this article, we’ll go over some common mistakes sole traders make with accounting and offer some practical tips and advice on how you can head these problems off.


Not keeping good books

Bookkeeping isn’t about working as a librarian — it’s a term for the financial records you keep as part of your business.

If general accounting is the process of managing your accounts, bookkeeping is the details that matter. This includes all daily income and expenditures — for example, business transactions or company expenses.

It’s a lot, trying to keep every receipt, invoice and bill, but if you’re serious about your business, you’ll need to keep this information and categorise it in the right way.

Without a solid bookkeeping process, it’s hard to maintain accurate financial information. In turn, this makes it harder to build effective business plans, or report the right information to HMRC through your tax returns. (And if your tax returns are incorrect, some hefty penalties could ensue.)


Not knowing which records to keep

Many sole traders are simply unaware of the records they need to keep. Trying to flip between running a business and managing the accounts is a hard ask, even for the most hardworking of business owners.

We’d always advise hiring an accountant for a number of reasons. For one, the extra time you’ll save will be a real benefit to your business, as we can use our expertise to produce accounts and books of the highest calibre.


How do I manage my own accounts?

If you do want to manage your accounts solo, you’ll need to register with HMRC and make sure you understand the rules for running your business.

Sole traders are personally responsible for their business (unlike a limited company, which exists as a separate entity in its own right). Technically you’re self-employed, but you can hire staff if you want to.

As a sole trader, you must:

  • keep records of your sales and expenses
  • submit an annual self-assessment tax return and pay income tax on your profits
  • pay Class 2 and Class 4 National Insurance
  • register for VAT (if your turnover is over the VAT threshold – although you can do this even if it’s under the threshold)
  • manage your business debts with full responsibility.

“How long do I have to keep records for?” we hear you ask. The answer: six years.

Businesses are randomly checked by HMRC to ensure they are compliant with tax regulations, so make sure all paperwork is accurate and current.

Plus, business costs can help you reduce your tax bill at the end of the year by claiming allowable expenses — it’s worth keeping records simply for this fact. These can include:

  • technology, stationery and internet access
  • rent
  • phone bills
  • travel costs
  • motor expenses.

Always get receipts and invoices. Without these, you’ll struggle to claim expenses. You don’t have to keep them all physically, though — if you use cloud accounting software, you can upload them and do away with the paper afterwards.

Always ask for a VAT receipt when you buy anything for your business — like a cup of coffee with a client — as some places don’t issue them by default.


Not paying the right taxes as a sole trader

As a sole trader, you’ll have to pay different taxes depending on how you work. Not paying these will land you in hot water, so it’s best to know what you’re up against.


Income tax

You must report your business income and expenses to HMRC at the end of each tax year.

This must be submitted via a self-assessment tax return by the following 31 January. Using this information, HMRC will give you a tax bill, which you’ll need to pay by the same deadline. You might also need to make ‘payments on account’, depending on the amount of income you need to pay tax on – these are advance payments, due twice a year on 31 January and 31 July.

The sooner you do this, the better. It’s just not worth waiting for the deadline.

We’d always advise setting aside at least 30% of your earnings to pay for tax. It’s good business practice and gives you a buffer to clear taxes.


National Insurance

When you first set up as a sole trader, you’ll need to let HMRC know.

Then you’ll need to pay your quarterly Class 2 National Insurance bill — this is a basic payment that goes towards your state pension.

At the end of your tax year, your accountant will calculate any extra Class 4 National Insurance contributions.



You need to register for VAT if your turnover is more than the current threshold of £85,000.

You can register voluntarily if you are below the threshold — some sole traders decide to do this for credibility purposes, or because it makes financial sense based on the amount they can claim. It’s best to get advice to find out if voluntary VAT-registration is a good option for your business.

If you’re registered, you can reclaim VAT on many of the items you buy for your business — this is especially important if you’re buying and selling a lot of stock.

And you can choose between the standard VAT scheme or flat-rate VAT, which was set up to help reduce admin for smaller businesses.

The flat-rate scheme allows you to pay VAT to HMRC at a flat rate, depending on the industry you’re in.

We’d advise double-checking with an accountant to ensure you use the right scheme.



You may come to a point where you want to take on staff — when this does happen, you’ll need to register as an employer and record PAYE and National Insurance details. Make sure you keep records for three years from the tax year-end.

Records normally include:

  • employee pay and any deductions you make, including pension schemes
  • Absences like leave and sickness
  • expenses or benefits incurred by your staff
  • any charity-matching expenses applied to the payroll giving scheme.


Final thoughts

Working as a sole trader is hard work, but if it’s done right, it’s immensely rewarding. Countless issues can derail your work if you’re not careful. But do things properly, and you’ll succeed financially and strategically.

Some other top tips to mention before we wrap up:

  • Always use cloud accounting software. It makes strong record-keeping far easier. We recommend Xero.
  • Speak to other business owners. The best way to learn is by listening to others and their challenges.
  • Get into accounting habits early. They’ll set you up for success and give you a foundation you can grow from.

For tailored sole trader accounting advice and support, get in touch today.

Ready to go? We’re excited to hear from you.

Let’s get started, as soon as you’re ready. We’re always up for a chat about how we can support you and your business.

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