Keeping track of your business expenses: tips for sole traders

Although your days can be busy enough when you’re a sole trader, with many things competing for your attention, there are two very good reasons to keep track of your business expenses.

Firstly, it can help you to better understand what you buy, when you buy and how much you pay. This can enable you to identify where you’re wasting money or areas where you could be getting better value for money. Eliminating waste and getting better value for money from your suppliers can improve your monthly cash flow significantly.

Secondly, keeping track of your expenses throughout the year can really help when you’re completing your Self Assessment tax returns. It can save you a lot of time, while ensuring that you claim all of the allowable expenses to which you’re entitled.

What expenses should I track for taxes?

The simple answer is all of your sole trader business expenses. Sole traders can claim a wide range of allowable expenses, from large overheads such as rent, mortgage interest, rates and utilities through to relatively small costs, such as copier paper, pens and postage stamps.

Other common expenses for sole traders include fuel, mobile phone and stock/raw materials, while some sole traders have to travel for business, with accommodation and overnight meals to pay for. Some sole traders must buy protective clothing for work, while membership of a trade association is essential for others.

These are all sole trader allowable expenses and should be tracked carefully. Even seemingly small costs when added up and spread over the course of a tax year can add up to many hundreds of pounds or more.

Keeping a record of your expenses

Sole traders and members of ordinary business partnerships must keep accurate records of their business income and expenses. They’re essential when completing your Self Assessment tax return. Although you don’t need to submit them when you file, HMRC can later ask to inspect your financial records, so they must be accurate and up to date.

Get into the habit of updating your financial records regularly (at least every month, if not weekly). You must be thorough, so give yourself enough time. Updating your financial records regularly helps to keep the task manageable – otherwise it can turn into something you dread – while also giving you a good idea of your sales/earnings, costs/expenses and cash flow.

Business expense categories

Your business expenses/costs should be categorised within your bookkeeping/accounting software. Categories can include: rent, rates, utilities, phone, broadband, insurance, payroll, staff benefits (if you employ others), stock/raw materials, travel/vehicle (inc fuel), professional services, office supplies/stationery, postage, marketing, bank interest/fees, etc.

This list isn’t comprehensive and categories will vary from business to business. All costs should be entered into the relevant category. If you can connect your bank and credit card accounts, which popular accounting software enables you to do, all transactions are automatically uploaded. All you need then do is categorise them, which is quick and easy.

Accounting software usually comes with existing expense categories, which you can customise. Sometimes, you can specify your sector and relevant categories appear. Categories are divided into months of the year, so you can compare your spending. Usually, these are automatically added up to calculate your category-specific costs and total expenses for the tax year. This makes filing your Self Assessment tax return far easier.

What about invoices and receipts?

You should retain all invoices and receipts for things you buy for your business. HMRC can ask to see proof. If you keep physical copies, they should be categorised, either by type of expense, month or both. Use them, together with your bank/credit card statements to update your financial records regularly.

Alternatively, numerous smartphone “expense-tracker” apps are now available that you can use on-the-go to photograph and categorise purchase receipts. They make the task much easier. Many can be integrated with accounting software, which makes the whole process even more efficient, saving you time so you can get on with other things that contribute far more value to your business.

Need to know! You must keep your records and proof of expenses for at least five years after the 31 January Self Assessment submission deadline of the relevant tax year. HMRC can ask to see both.

More reading

• 45 allowable expenses sole traders can claim
• What allowable expenses can you claim when you’re self-employed and work from home?
• What vehicle, travel, hotel and meal expenses can you claim when you’re self-employed?

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.