Essential guide to self-employed accounting

If you’ve chosen the self-employment path, you’re in good company. Today, there are 4.24 million self-employed people in the UK.

From side hustlers and freelancers to contractors and independent business owners – self-employment looks different from person to person. But one thing they all have in common is the need for self-employed accounting.

With so many business types under the self-employed banner, how can you make sure you’re getting accounting right for your niche? In this comprehensive guide, we break down the basics of doing your accounting. You’ll learn self-employed accounting practices, and tips on accounting methods, tax preparation and working with an accounting professional.

What are self-employed accounts?

Self-employed accounts are records of income and expenditure kept by sole traders.

Maintaining your self-employed accounts is essential for tax compliance, but also for understanding and presenting the financial picture of your business. For example, if you wanted to pitch your brand to investors or apply for a loan, they would need to check your finances first.

There are lots of moving parts to self-employed accounting: keeping accurate records of income and expenditure, paying bills and sending invoices, filing tax returns, and managing cash flow.

How can you manage your own accounts when self-employed in the UK?

Though you may find it easier to have an accountant or bookkeeper take care of things, it’s true that you can manage your own accounting as a self-employed person in the UK.

If you’re planning to tackle your own accounts, the following steps will guide you through.

Register as a sole trader

If you’ve earned income of more than £1,000 from self-employment in the past tax year, you need to register as a sole trader with HMRC. You can do this on the gov.uk website – simply follow the link on registering for self assessment and set up as a sole trader via your Government Gateway account (or this self assessment registration form).

You’ll receive a UTR (unique taxpayer reference) number in the post within two to three weeks (depending on where you live). You’ll need to use this to submit your self assessment tax return, so keep it in a safe place.

The deadline for registering is 5 October, following the end of the tax year. For example, if you’ve earned above £1,000 between April 2022 and April 2023, you would need to register by 5 October 2023.

Our guide exploring how to register as a sole trader can help with this.

Choose your method of self-employed accounting

Self-employed people have the choice between multiple accounting methods: cash basis, accrual basis and hybrid accounting.

1. Cash basis accounting involves recording income and expenditure when you pay or receive money. The recording part happens when money changes hands.
2. Accrual basis accounting involves recording income and expenditure when sales invoices are raised or purchases are made – before the money has been transferred. For example, you would record an electricity bill as soon as you received it from the supplier (instead of when you pay it – which could be several days later).
3. Some businesses combine cash basis and accrual basis accounting in a hybrid method. Day to day accounting is completed using cash basis, but long term financial planning is conducted using accrual basis.

You should note, cash basis accounting can make your business appear in profit, even if you have a bunch of outstanding bills. By contrast, accrual basis accounting shows you everything your business owns and owes at any given time.

When it comes to accounting for self-employed people, there’s no one right method. Talking with an accountant or bookkeeper can help you decide the best one for you. If you’re still weighing up the options, check out our guide on cash accounting versus accrual accounting.

Set up a business account

If you’re a sole trader in the UK, you don’t need a separate business bank account. But it can make accounting and bookkeeping far easier; you don’t need to filter through personal and business transactions when you’re reconciling your accounts. Plus, it’s easier to see your cash position at a glance, because it isn’t clouded by personal transactions.

There are plenty of small business accounts to choose from – many have free and low-cost tiers you can explore.

Record your income and expenses

There are many ways you can record income and expenses, and having a dedicated business bank account helps. You can import your bank statements into spreadsheets or software, and work through each expense individually. Matching them up with receipts and evidence is especially important, should HMRC wish to check proof of expenditure. Read this guide on how to keep track of expenses for more methods.

When tax time comes around, you can claim back certain business expenses, known as ‘allowable expenses’. These are deducted from your income before tax – so claiming the correct expenses ensures you’re paying the right amount of tax. We share a full list of allowable expenses here, but things like equipment expenses, software expenses, business mileage deductions, and office costs are typically included.

Checking your expenses regularly can help you keep costs down, and ensure you’re claiming the right amount of allowable expenses on your income tax return.

Calculating your self-employment tax

As a self-employed person, your income tax will be calculated on trading profits above £12,570 for the tax year 2023/24.

Income tax rates can vary – consult the list below to check yours:

• 20% for profits between £12,571 and £50,270
• 40% for profits between £50,271 and £125,140
• 45% on profits above £125,140

Please note, if you have taxable profits above £100,000, your personal allowance (£12,570) will reduce by £1 for every £2 of profits earned above £100,000.

You can calculate your self-employment tax by subtracting your allowable expenses from your total income, and applying the relevant rate to the remaining number. Or try HMRC’s online estimating tool to help with tax planning.

Bear in mind: things work a little differently if you also pay tax through PAYE. Learn more about calculating your self-employed tax in our guide.

Prepare your self assessment tax return

The deadline for filing income tax self assessment is 31 January for online submissions, and 31 October for paper submissions.

You’ll need your UTR number and a handful of basic details – such as your business name and address – to submit your return. Using your records of self-employment income and expenditure, fill in the online or paper form so that HMRC can calculate your tax. Read our guide on how to fill in a self assessment tax return online for step-by-step support.

Over the next few years, HMRC will phase in Making Tax Digital for Income Tax, which means the way you manage your income tax may change. For example, if you earn more than £50,000, the way you submit your self assessment tax return will change in 2026. You can read more about the changes to self assessment tax returns here.

Check if you need to register for VAT

Self-employed people with turnover above the £85,000 VAT taxable threshold must register for VAT.

If you earned above this threshold in the last 12 months, or you expect to exceed this threshold in the next 30 days, it’s time to sign up for VAT.

Note: you need to register for VAT within 30 days of the month in which you exceeded this threshold. Self-employed people can also sign up for VAT voluntarily. Read our guide on how to register for VAT for more info.

Consider using accounting software

Self-employed accounting software can reduce the time you spend on admin, and equip you with the numbers to make smarter financial decisions.

Simple automations take care of data admin for you – meaning you spend less time totting up the numbers, and more time making them work for your business. See your cash flow position at a glance with live bank feeds and dashboards that contain all the important data.

Smart software packages provide customiseable reports and forecasts that let you make financial decisions that work today, and in the future.

Tax preparation for self-employed people is easier with software. You can prepare and submit a range of tax returns directly from the platform, using records stored securely in your software. If you adopt software now, you’ll be getting ahead on Making Tax Digital for self-employed people too.

Common self-employment accounting mistakes

Feeling confident with your accounting will take practice. Little and often is best, and when in doubt, speak to an accounting professional who can guide you.

Common self-employment accounting mistakes to look out for include:

• Reconciling your accounts too infrequently – and then not being able to make sense of transactions when you do
• Not claiming the right allowable expenses, so your tax bill is higher or lower than it should be
• Failing to store receipts and evidence in a secure and easily accessible location
• Not planning for your tax bill by putting a percentage of your income away each month
• Missing the deadlines for income tax or VAT
• Not chasing late payments, so you miss out on income that should be yours

Most of these mistakes can be avoided by attending to your bookkeeping and accounting regularly. Make sure you’re coding transactions correctly, so you can identify allowable expenses. And pop the tax deadlines in your calendar, so you don’t miss them.

Last but not least, follow up on late payments promptly, so you don’t miss out on income. If you’re using software, you could set up automated late payment reminders or introduce late payment fees.

How long do you need to keep self-employed accounts?

You must keep self-employed accounts records for five years, following the 31 January deadline. HMRC could ask to see your records at any time, so storing them safely is a must. Self-employed accounting software makes storing records, receipts and invoices simple.

Is it worth getting an accountant if you’re self-employed?

Many self-employed people choose to do their own accounting. With the right software in place, you may have everything you need to handle your accounting obligations.

Other people appreciate the strategic expertise of an accountant or bookkeeper who can offer services beyond compliance. Should you wish to apply for a business loan, require a mortgage application or start employing people, accounting professionals can offer invaluable support. For more info, read our guide on when to consider hiring an accountant.

You should also consider how much time you want to commit or have to commit to your accounts. Bank reconciliation should be completed regularly – monthly is ideal. Do you have the time or capacity to sit down every month and balance the books? Or submit your own self-employed tax returns?

Finding the right accountant or bookkeeper for your business takes time. You may want to consider your specific industry niche or business structure – many practices choose to specialise in certain areas, such as accounting for self-employed people. Read our guide on how to choose an accountant to help you find the perfect fit.

Make self-employed accounting easy

Understanding your financial picture has never been so easy with self-employed accounting software.

Automate the admin, gain access to reliable financial data, and submit returns directly from Xero’s accounting software for self-employed people. Spend less time on the numbers, and more time putting them to work for your business.

It’s also worth checking out Xero Go, which is the perfect solution for sole traders and the self-employed.