HMRC requires sole traders to keep financial records for at least five years after the 31 January filing deadline for the relevant tax year. For 2025/26, you must keep records until at least 31 January 2032. Records can be kept digitally or on paper.
What records does HMRC require?
You must be able to show HMRC the following if asked:
- All income received (bank statements, invoices, receipts)
- All business expenses paid (receipts, bank statements)
- Details of assets bought and sold for the business
- Details of goods or stock taken for personal use
- A record of any personal use of business assets
Cash basis vs accruals accounting
Most sole traders can choose between two methods of accounting:
| Method | How it works | Best for |
|---|---|---|
| Cash basis | Record income when received, expenses when paid | Sole traders with simple finances and turnover under £150,000 |
| Accruals (traditional) | Record income when earned, expenses when incurred | Growing businesses, those with significant debtors or creditors |
The cash basis is simpler and is used by most sole traders. HMRC default is now accruals for new traders, but you can elect for cash basis when submitting your return.
The minimum bookkeeping system
At its simplest, you need:
- A business bank account (separate from personal)
- A spreadsheet or app tracking all income and expenses by date and category
- A folder (physical or digital) for all receipts and invoices
Even a simple spreadsheet with columns for date, description, income, and expense will satisfy HMRC requirements if you can reconcile it to your bank statements.
Recommended software for sole traders
Accounting software automates much of the record-keeping and makes filing your Self Assessment significantly easier. Popular options include:
- Xero: Widely used, excellent bank feeds and mobile app
- QuickBooks Online: Strong invoicing, good for sole traders
- Sage Accounting: UK-focused, good HMRC integration
- FreeAgent: Designed for freelancers, very easy to use
Making Tax Digital for Income Tax (MTD for IT)
MTD for Income Tax will require most sole traders with income above £50,000 to keep digital records and submit quarterly updates to HMRC from April 2026. Those with income above £30,000 will follow from April 2027. If this applies to you, software that is MTD-compatible is essential.
Spend 20 minutes per week updating your books. A small regular habit prevents a large January panic and reduces the risk of missing deductible expenses.
This guide provides general information only and does not constitute financial, tax, or legal advice. For your specific situation, consult a qualified accountant. Find one via our accountant directory.