How to track income and expenses for UK sole traders

Updated 2026-11-08

1. Know the tax year and Self Assessment deadline

The UK tax year runs from 6 April to 5 April the following year. Your online Self Assessment tax return and any payment must be submitted by 31 January after the end of the tax year. check GOV.UK for the current rules.

2. When does Making Tax Digital (MTD) for Income Tax affect you?

MTD for Income Tax applies to sole traders and landlords who earn qualifying income from self-employment or property. The thresholds are:

Over £50,000 for the 2024-25 tax year - you must use MTD from 6 April 2026.
Over £30,000 for the 2025-26 tax year - you must use MTD from 6 April 2027.
Over £20,000 for the 2026-27 tax year - you must use MTD from 6 April 2028.

If your turnover is below these limits you can continue using the traditional paper or spreadsheet method, but you should still keep records in a digital format for ease of filing. check GOV.UK for the current rules.

3. Choose a digital record-keeping approach that meets the rules

HMRC requires you to use software that can exchange data with its system. A plain spreadsheet is not compatible software on its own, but you can use it alongside a "bridging" solution that connects the spreadsheet to HMRC. This lets you keep the familiar layout while staying compliant. check GOV.UK for the current rules.

4. Set up a simple spreadsheet (or compatible app)

If you prefer a spreadsheet, create a new workbook with three main tabs:

Income - date, client, invoice number, amount, VAT (if applicable).
Expenses - date, supplier, description, amount, category (e.g., travel, office, marketing).
Summary - automatically totals income, expenses and calculates net profit.

Use basic formulas (SUM, IF) to keep the totals up-to-date. Save the file in a cloud folder (e.g., Google Drive or OneDrive) so you have a backup and can access it from any device.

5. Record every piece of income

Create an invoice for each sale or service.
Enter the invoice details in the Income tab on the same day you issue it.
Mark the invoice as paid once the money arrives and note the payment method.
Reconcile your bank statements monthly to ensure nothing is missed.

6. Capture allowable expenses correctly

Keep receipts for every purchase you intend to claim - a digital photo works as long as it is clear and legible.
Enter the expense in the Expenses tab, assigning it to a category.
Allocate mixed-use costs (e.g., home internet) proportionally between business and personal use.
Review the totals at the end of each month to spot any unusual spikes.

7. Store supporting documents safely

HMRC may ask to see the original evidence for any figure you put on your tax return. Store digital copies in a folder structure that mirrors your spreadsheet (e.g., Income/2024/Invoices, Expenses/2024/Receipts). Back up the folder regularly and keep the originals for at least five years. check GOV.UK for the current rules.

8. Review before the filing deadline

Run the Summary tab to see your net profit.
Check the figures against your bank statements and any accounting software you use.
Export the data to a CSV file if you are using a bridging tool that will push the numbers to HMRC.
Submit your Self Assessment online by 31 January and pay any tax due.

FAQ

Q: Do I need to switch to MTD software if my turnover is below £20,000? A: No, the thresholds start at £20,000 for the 2026-27 tax year. Below that you can continue with your current method, but keep records digitally for ease of filing. check GOV.UK for the current rules.

Q: Can I use a spreadsheet on its own? A: A spreadsheet alone does not meet the HMRC requirement for MTD-compatible software. You can use it together with a bridging solution that links the data to HMRC. check GOV.UK for the current rules.

Q: How long must I keep my records? A: HMRC expects you to retain business records for at least five years after the filing deadline. check GOV.UK for the current rules.

Q: What if I also rent out a property? A: Property income is subject to the same MTD thresholds. If your rental earnings push you above the relevant limit, you will need to use MTD for that income as well. check GOV.UK for the current rules.