I’ve touched on limited company accounts in the past – but what steps do you need to take to manage your books effectively when you’re working as a sole trader? Here are 9 tips for new entrepreneurs!
1. The number one rule: separate your business and personal finances!
Pooling together everything you have might work OK for a few months, but if you’re ready to start taking life as an entrepreneur seriously, you’ll need to set up separate bank accounts for your personal and business ‘pots’. This will make it so much easier to track your transactions, particularly your expenses (I’ll explain more later).
2. Register with HMRC
You should register with HMRC as soon as you can after you begin trading, but you will definitely need to officially list your business before 5th October in its second tax year, otherwise you could be fined. Once you do so, you will need to submit an annual self-assessment tax return and pay income tax on your profits, as well as Class 4 National Insurance. You will also have to register for VAT if you earn (or expect to earn) more than £85,000 per year; you can choose to register early if you want to.
3. Keep on top of your bookkeeping
Every invoice, receipt and bill that’s related to your business needs to be logged. It’s the only way you’ll be able to find the information you need to complete an accurate tax return – and keeping your books up to date will also help you manage cash flow and identify wastage much faster. Plus, any errors in your tax returns might incur penalties, and as a sole trader, the onus will fall on you to get the sums right.
You’ll need to keep all records for six years. And remember, HMRC has the right to carry out random inspections to make sure sole traders are compliant, so it’s doubly important that you track your accounts in the correct way.
Bookkeeping can feel like a daunting prospect, especially if you’re not great with numbers and you’ve got a thousand other plates to spin. That’s why so many sole traders decide to hire a bookkeeper like me. I can take this essential task off your plate, leaving you free to focus on your strengths.
4. Use accounting software
Setting yourself up with HMRC-compliant accounting software will make the entire accounting process SO much easier. Software like QuickBooks, Xero, or FreeAgent helps automate many accounting tasks, such as invoicing, expense tracking, and generating financial reports. This software often includes features that help you stay compliant with tax laws, including Making Tax Digital (click here for more information on this).
5. Make a note of your tax obligations and deadlines
The main deadlines you need to be aware of as a sole trader are for your self-assessment tax return, tax payments (and potentially payments on account), and VAT return (if you are VAT registered). As mentioned, specialist accounting software can not only help you prepare your financial information quickly and easily, but it will also send you regular reminders, so you are much less likely to miss something.
You’ll find everything you need to know about HMRC deadlines in this article.
6. Track your allowable expenses
Business costs can help you reduce your tax liability at the end of each year. From computer equipment to internet bills, office rent to travel fees, many of your business-critical transactions can be treated as ‘allowable expenses’ in this way. Find more information on what you can put through for tax relief purposes.
7. Get savvy with invoicing
Timely payments will keep your business running smoothly – so get clear on your payment terms and make sure you communicate them with your debtors. Keeping on top of your accounts will also help you spot any late payers or duplicate payments.
You can find more tips on how to invoice correctly here. I’ve also provided advice on payment chasing.
8. Stay up to date with regulatory changes
The government changes tax thresholds and other business-critical legislation all the time, so it’s vital to stay up to date with what’s happening. This is yet another benefit of hiring a professional bookkeeper – my job is to keep an eye on the news for you, and let you know if any announcements might affect your work and your setup as a sole trader.
9. Review your financial performance regularly
Things like your profit and loss statements, balance sheets and cash flow statements can help you better understand how your business is doing financially, and decide on your next move with confidence. But these documents are only useful if they are accurate and up to date – and that’s why bookkeeping is so essential.
If you’re a sole trader with a predominantly web-based venture, you might benefit from my bookkeeping tips for online business owners.
