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Bookkeeping for sole traders

How bookkeeping applies to the self-employed

If you’re setting up as a sole trader rather than as a company with employees, then your bookkeeping work can be kept to a minimum. There’s the added advantage that sole traders pay less tax than any other class of working people, although you have to be careful that you don’t fall foul of the IR35 regulation. This rule, which quite simply states that ‘if it looks like an employee, it’s an employee’ was introduced to prevent contractors working on site for single clients for long periods of time, effectively acting as employees but invoicing as sole traders or single-employee Limited companies. The ruling has been challenged a number of times, but is unlikely to be repealed in the near future.

As a sole trader you have to keep track of monthly income and expenditure, which means holding on to all invoices and receipts. You’ll also have to talk to HMRC about National Insurance contributions; the easiest way to handle these is by setting up a Direct Debit. The amounts involved are quite small.

You could manage your accounts by hand, but it’s easier to do it using a computer. A spreadsheet will suffice, containing columns for income, expenditure and VAT (if you’re VAT-registered). This means keeping track of all invoices (along with the dates they were issued and the dates they were paid) and all receipts for work-related transactions, including any ground rent, telephone bills, heating and electricity bills and so on. If you work from home, some of your household expenditure may be tax-deductible.

This is all the information you’ll need to fill in the Tax Return form each year. You can then either attempt to calculate the amount of tax owed yourself or send the form to HMRC and have them do it for you. It’s all quite painless and should take no more than a couple of hours each month.

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