Keeping Tax Records and Bookkeeping When You’re Self-Employed

If you’re self-employed keeping tax records are a legal requirement. Bookkeeping is how you can make this easier on yourself, as well as tax time.

I put this guide together for anyone who is setting up a business or is already self-employed and wants to get their ducks in a row.

I’ll list out the tax records you need to keep for your business, how to store them and how to set up a bookkeeping system. I also share my recommended daily, weekly and monthly bookkeeping tasks to help you stay on top of things.

What Tax Records Should Your Keep When You’re Self-Employed?

Your tax records are all the different pieces of documentation that you need to complete a tax return for HMRC.

That includes information you’ll need on your business, that’s why it makes sense to put them away as you do your bookkeeping.

Here are some of the typical tax and accounting records that self-employed business owners need to keep:

  • Bank statements
  • Sales invoices
  • Purchases invoices and receipts
  • Cash receipts
  • Till rolls
  • Marketplace statements and invoices like eBay, Etsy and Amazon
  • VAT records (if you’re VAT registered)
  • P60s or P45s if you are employed
  • Mileage claim forms
  • Records about any other income such as dividends or capital gains
  • Copies of previous tax returns and tax calculations you have submitted

How Long Should The Self Employed Keep Tax Records?

Every time you send in a tax return, HMRC reserves the right to ask questions about the numbers and request that you show evidence of how you reached that number and check you’ve paid the right amount of tax.

You are legally required to keep your tax records, including copies of tax returns, for HMRC for at least 5 years after the 31 January you submit your tax return. 

For example:

You must keep all your tax records for your 2018/2019 tax return, which is due by 31 January 2020 until the 31 January 2025 at least.

Keeping Tax Records 

There are no set rules in place telling you how to keep your tax records. 

Fortunately, you no longer need to keep paper copies of your HMRC tax records. That means keeping your records digitally is probably the easiest way to hold onto them for the right number of years.

Of course, you can still choose to keep paper copies, just make sure you print and file all the correct information. 

I’ve written a detailed guide on organising business receipts to help get you set up with a system that you can use year after year. But I keep all my tax records in google drive, filed by tax year, with sub-folders for bank statements, invoices, supplier invoices etc.

What Happens if You Lose Tax Records

If you have misplaced tax and accounting records then try to get copies. For example by calling your supplier or banks and checking through old emails.

It is a legal requirement to have your tax records so it’s really important.

You may have to pay penalties or interest if you cannot support figures on your tax return and it turns out you have not paid enough tax.

If you are completing your tax return and are missing information you can still submit it but you must let HMRC know if you are using provisional or estimated numbers.

Provisional means you’ll be getting the lost records replaced and will confirm the correct figures later

Estimated means you have lost the relevant tax records, are making a best guess and will not be changing the figures.

What Is Bookkeeping?

Put simply, bookkeeping is a way of tracking all your business income and expenses during a set period of time.

Being self-employed or a sole trader means that you are legally required by HMRC to submit a tax return which summarises all your income and expenses, as well as calculating your own taxes.

Your bookkeeping system will provide you with the numbers you’ll need to complete your tax return, saving you from tax hell. 

A good bookkeeping system will add up your income and expenses.  But a great bookkeeping system will: 

  • help you to analyse your costs to stop you from wasting money; 
  • estimate how much tax you owe, so you can tuck it away;
  • tell you where you are making the most money so you can make more of it;
  • automate some of the boring bookkeeping tasks you can’t get away from;
  • give you the numbers you’ll need to complete your tax return.

How to Set Up a Bookkeeping System

The first thing to do is to open a business bank account. Keeping all the financial transactions of your business separate from your personal payments is a sure-fire way to make your bookkeeping easy.

It’s also recommended by HMRC for the self-employed and sole traders. If you have a Limited Company then you are legally required to open a separate bank account.

Imagine if you had to sift through all your personal costs to find your business ones? It could take forever and you might miss out on some of those precious expenses that will reduce your tax bill.

Once you have a business bank account set up, the one piece of advice I’d give you is to never dip into it. Instead, set yourself a regular salary.

The most successful business owners I have come across have always treated themselves just like an employee of their business.

How to Pay Yourself from Your Small Business

Next, you need some kind of bookkeeping system, even if you are just starting out and only have a few transactions somewhere it’ll help you keep a record of anything you paid for personally

If you have a simple business and not too many transactions, then you can choose to use a bookkeeping spreadsheet. Or you can invest in using an automated online system, like Quickbooks, which you’ll pay monthly for.

My bookkeeping spreadsheet lets you to easily keep an eye of everything an accountant would. You can estimate tax, manage cash flow, budget accurately, and more – all from one pre-automated spreadsheet.

How Often Should You Do Your Bookkeeping?

The key to making your bookkeeping easy is staying on top of it.

But it can’t take up too much of your precious time. After all, being a business owner is much more than just bank statements, receipts and number crunching! 

I’ve split all the likely bookkeeping tasks you’ll need to do into a daily, weekly, monthly and annual checklist to help you stay organised. It may help you to put them into your diary.

Daily Bookkeeping Tasks

  • Check your bank account and review money in and money out, marking off any payments on the Client Invoicing tab;
  • Invoice your clients for any work completed;
  • Update the bank statement input tab for the week’s bank transactions;
  • Record your business mileage and cash expenses;
  • Check which invoiced clients have exceeded the credit terms offered and chase for payments where necessary;
  • File receipts and invoices safely, either as a scan or paper copy in a folder

Monthly Bookkeeping Tasks

  • Review your results on the Business Results tab;
  • Transfer money into a deposit account for your tax bill due 31 January and 31 July each year;
  • Scan in your business paperwork and file securely online

Annually Bookkeeping Tasks

  • Close off your bookkeeping spreadsheet for the UK tax year;
  • Complete your self-assessment tax return by 31 January each year and pay any tax due by 31 January and 31 July each year;
  • Start with a new copy of the bookkeeping spreadsheet and being populating it with transactions for your new financial year.

New Here? Learn how to set up the financial side of your business with these easy to understand guides and resources:

  • Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
  • Tax Records and Bookkeeping – Understand what tax records you’ll need to keep and how to set up your own bookkeeping system;
  • Self Employment Taxes Explained – Learn what taxes you’ll pay, how much and when;
  • VAT Guides – From registration to de-registration, VAT schemes and thresholds, these guides will take you through the basics every UK small business owner needs to know;
  • Invoice Template – Free template and step-by-step guide so you can get paid by your clients.
Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.