How to Make the Most of your
Accounting Software as a Sole Trader

As a sole trader, managing your accounts will be relatively simple. However, because you are self-employed and looking after so many aspects of the business yourself, it can be easy to let the accounts slide as other tasks frequently take priority.

Accounting guide for individuals managing multiple businesses and clients

At one end of the scale, you may have a large enterprise which has acquired smaller businesses to fill the gaps in your operation. Perhaps you want to set up an incubator where startups can thrive. Or maybe you’re a sole trader looking for more of a portfolio career – offering childminding during the week and wedding photography at the weekends.

How can you arrange your accounts so that you keep on top of all these complex different elements? Whatever the nature of your different businesses, there are some key factors in running the accounts for multiple businesses and clients successfully.

Getting started as a sole trader

Firstly, you’ll need to register with HM Revenue and Customs (HMRC) and make sure you understand their rules on running and naming your business. As a sole trader you are responsible for the business. You will be classed as self-employed, although you can still take on staff.

What factors do you have to consider when managing the accounts as a sole trader?

As a sole trader, you must:

1) keep records of your sales and expenses
2) submit an annual Self-Assessment tax return and pay Income Tax on your profits
3) pay Class 2 and Class 4 National Insurance
4) register for VAT (if your turnover is over the VAT threshold)
5) take responsibility for any business debts

You will need to keep a record of all your invoices and receipts for six years. HMRC carry out random checks on businesses to check that they are compliant with tax regulations, so you’ll need to hang on to all the paperwork and make sure it is all accurate and up to date.

Anything that is a business cost can help reduce your tax bill at the end of the year. This will include:

- Computers equipment and internet access
- Rent
- Stationery
- Phone bills
- Travel to customer premises
- Motor expenses

It pays to get into good habits from the beginning when it comes to keeping track of receipts. If you regularly get the train to go and see clients, always keep the tickets in a separate part of your bag, or buy them online before you go so you have an email record. When you buy a coffee, always request the VAT receipt – some cafes don’t issue a receipt by default.

How online accountancy software can help

If you are entering all your transactions into online accounting software like Sage One throughout the year, you will be keeping accurate records as you go.

Sage One also shows any transactions that have been deleted so there is a clear activity trail – very helpful if something has been deleted in error. Using online accounting software as a sole trader also means you can cut down on paper – saving you money, and space, which may be in short supply in your home office or workshop!

And because each time you add a new supplier to the system you’ll be making note of their full contact details, you don’t have to worry about keeping an address book up to date.

It is good practice to keep on top of your accounts. Depending on the size and complexity of your business, this could be monthly or weekly. By finding time to do it regularly you can quickly clear up any queries…what was that receipt for again? Or you can spot someone who hasn’t paid their invoice on time and gently suggest that you can’t do anymore work until you’re all square.

Keeping the tax man happy

A sole trader there are several taxes you will have to pay to HMRC:

Income tax and your Self-Assessment Tax return: As a sole trader you must report your business profits at the end of each tax year in April.

Your accountant will need a full set of your accounts showing income and expenditure, from which they can work out your tax liability.

You will need to pay your tax on this income by the following 31 January. We can recommend completing the process much sooner – don’t put it off until the night before the deadline!

Once you are in the system and have paid your first return, you will need to pay tax twice a year, on 31 January and 31 July. This is known as payments on account. Each payment is equal to half the amount of tax you owe for the previous tax year.

TIP! It’s good practice to put aside 30% of everything you earn. Consider setting up a separate bank account for this so you know the money is there to pay for tax, National Insurance and VAT when you need it.

National Insurance: When you set up as a sole trader you will need to let HMRC know within three months.

You will need to pay your quarterly Class 2 National Insurance bill, which is a basic payment which goes towards your state pension in the future. Any extra Class 4 NI payments will be calculated by your accountant at the end of your tax year.

Tip! Sometimes self-employed people have a mix of permanent employment and freelance work on the go, for example someone who works in a bank during the week but writes children’s books in the evening or has a side business making jewellery. Just make sure that you are not doubling up on your National Insurance contributions.

How online accountancy software can help

Using online accountancy software like Sage One enables you to collaborate closely with your accountant. Being cloud based, they can log in remotely and you can work together in real time.

There is also free 24/7 telephone and email support, plus web chat available 9am-5pm Monday to Friday. So you always have someone on hand when you have a niggly question about using the right nominal codes and setting up suppliers correctly.

Registering for VAT

As a sole trader, you will need to register for VAT if your turnover is more than the current threshold.

You can register voluntarily even if you are below the threshold, and some sole traders decide to do this because it implies you are a more established, trustworthy business.

You will be able to claim the VAT back on everything you buy for the business, which will be advantageous if the nature of your business is buying stock and selling it on – for example someone who makes crafts for the home or a plumber who is frequently fitting parts in appliances. If you simply charge for your time, like a designer or business coach, then registering for VAT voluntarily won’t bring you so many financial advantages.

You can opt for the standard VAT scheme or Flat Rate VAT, which was set up to help reduce the admin load for smaller businesses.

In the Flat Rate scheme, you simply charge your customers at the standard rate of VAT and pay the money back to HMRC at a lower rate, depending on the nature of your business.

Tip! Make sure you pick the right category – there are lots to choose from and some of them sound similar but have different rates. Do double check with your accountant to make sure everything is in order from day one.

How online accountancy software can help

What counts here is speed and accuracy. With a system like Sage One you can run off your VAT return in minutes, check the figures and submit it to HMRC. If you set up a direct debit the money will be deducted on the 10th of the month following your VAT quarter, meaning no missed deadlines and no penalties – good news for the sole trader keeping a close eye on their bank balance.

Take responsibility for any business debts

When you start out as a sole trader it is a very good idea to set up a separate business account so your personal and company finances are kept separate. It’s one of those jobs you’ll thank yourself for later, as your business grows and there are more and more transactions happening relating to the business.

It will also help you keep an eye on cashflow. You need to get into the habit of chasing invoices early to make sure you have plenty of money to cover your salary and business costs.

You could also consider requesting deposits and staggered payments on larger jobs, rather than waiting for the project to be completed in full before you send your bill.

How online accountancy software can help

It’s very straightforward to connect Sage to your business bank account to streamline your accounting processes.

You can create quotes and invoices, customised with your branding and full contact details, which can be emailed to customers in PDF format. This speeds up the whole process of getting the work – and getting paid for it!

Start your 30-day free trial of Sage One and find out how the right online accounting software can help you manage your accounts as a sole trader.