Sole Traders & Partnerships

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Tax Rules for Sole Traders & Partnerships

Many people think that the rules are totally different for a sole trader or a partnership. (A partnership really, is just two or more sole traders working together). This is categorically not true. Most of the accounting and tax rules are the same or stem from the same basic principles. So, the rules are the same whether you operate as a sole trader, a partnership, or a company.

However, how you can take money out of your business from a tax perspective is more relaxed. And because you have unlimited personal liability, you’re entitled to more privacy. For example, you don’t have to file your accounts at Companies House. But, on the flip side, some of the rules are actually stricter. For example, those on subsistence (food) are less flexible for sole traders than for employees.

What Are the Rules for Your Accounts?

There’s no formal financial reporting standard for sole trader accounts, but we prepare them in a professional, consistent format. This helps you (and others) to understand your performance and financial position. That’s true whether you’re a sole trader or running a company.

Accurate, well-structured accounts are essential for sole traders and partnerships who will need them to:

open a bank account
apply for a credit card
apply for a business loan or to lease a car or van
attract investment or sell the business in future
get a mortgage or rent a property

Many mortgage lenders and landlords will only accept sole trader accounts and accountants’ certificates that have been signed off by a qualified accountant who’s a member of a recognised professional body.

Be Prepared

We often see new clients who were caught out by their tax bill before they became our clients. That’s usually because they’ve seen what they take out of the business (their drawings) as one of two things. They see it either as a cost or their taxable income. But drawings are not a business expense. And, sole traders and partners are taxed on their profits, not what they’ve paid themselves. Once we explain that, the bigger picture starts to make more sense.

Our sole trader and partnership clients don’t get a nasty surprise at the end of the year. That’s because we work with them throughout the year doing what we have decided to call Continuous Accounting. We also offer a quarterly service called “Finance Tracker”. This gives you a snapshot of your profitability, financial health and an estimate of your tax and National Insurance. This helps you set money aside as you go, using the income that created the tax bill. So you don’t end up trying to chase your tail to find the money for your tax bill.

Paying Tax

Accounts are also the starting point for your taxable profit calculation. I.e. what gets reported to HMRC on your self assessment or partnership tax return. The figures in your accounts are then adjusted, because tax rules and accounting rules don’t always align.

Some costs are allowable in your accounts but not for tax. And some are deductible for tax but not shown in your profit and loss. Not applying the rules correctly can mean underpaid tax. Whilst not knowing what you can claim can mean paying too much tax! Our experience means we not only know the rules, but we can interpret them and apply them to your specific circumstances.

Sole Traders Accounts

Making Tax Digital (MTD) will be mandatory from April 2026 for sole traders and property owners with a combined gross income of £50,000 or more in their 2024–25 tax returns. The threshold will lower to £30,000 from April 2027 and to £20,000 in April 2028. There is no date yet set for partnerships and companies.

A lot of people are a bit concerned about what Making Tax Digital means for them. But we are not, and neither are our clients. Our approach and working methods mean that we won’t have to do anything different to what we do now. We’ve got all our clients on digital records (Xero and Apron). Their accounts are prepared every quarter already, and we file their tax returns digitally (using TaxCalc). We registered a carefully chosen group of our clients for the MTD test phase with Xero and HMRC. So we’ll know exactly what to do by the time it becomes compulsory. If you’d like to streamline your accounting processes and remove the stress from complying with your existing — and upcoming — reporting duties, we’re perfectly placed to help.