Set your bookkeeping up in week one and it takes an hour a month forever. Leave it until you need it and you are reconstructing a year of decisions from bank statements and half-remembered receipts.
The setup itself is not difficult. It is six decisions, most of which take an afternoon. Here they are in the order that actually works.
Step 1: Open a separate business bank account
Do this before anything else, because every other step depends on it.
For a limited company it is close to non-negotiable. GOV.UK states there must be a clear division between the company’s finances and those of its owners and directors, because the company is a separate legal entity, and that the simplest way to keep finances separate is to open a business bank account.
For sole traders there is no legal requirement — you and the business are the same person for tax. Do it anyway. A separate account is the difference between bookkeeping being a sorting exercise and bookkeeping being an interrogation of your own weekly shop.
Practical point worth knowing: if you open a business current account with NatWest, Royal Bank of Scotland, Ulster Bank or Mettle, FreeAgent comes free with the account. That decision at step one can eliminate your software cost at step two.
Step 2: Choose software before you have a backlog
Migrating three months of transactions into new software is annoying. Migrating three years is a project.
Prices verified from provider pricing pages on 21 August 2026, all excluding VAT:
| Product | Price per month | Suits |
|---|---|---|
| Sage Sole Trader — free plan | £0 | Non-VAT-registered sole traders and landlords |
| Pandle — free plan | £0 | Very low volume, basic needs |
| Pandle Pro | £5 + VAT | Adds bank feeds, receipt uploads, MTD Income Tax submissions |
| Sage Sole Trader — paid | £7 | Sole traders wanting receipt scanning and multiple bank feeds |
| Xero Simple | £7 | Non-VAT-registered sole traders and landlords |
| QuickBooks Sole Trader Plus | £10 + VAT | Non-VAT-registered sole traders |
| QuickBooks Simple Start | £16 + VAT | VAT-registered |
| Xero Ignite | £18 | VAT-registered entry level, including VAT returns |
| Sage Accounting Start | £20 | VAT-registered, now includes payroll |
| FreeAgent — limited company | £33 | Free with NatWest, RBS, Ulster Bank or Mettle |
Two notes on that table. Xero’s figures are its prices from 1 September 2026, when UK subscriptions rose — Ignite was £16 before that date and Simple was unchanged at £7. And if you are not VAT registered, Simple is your Xero plan: the “Xero from £16” figure quoted almost everywhere is the VAT-registered tier, and it is now out of date as well.
Two things to check before you commit. Is it recognised by HMRC for the taxes you actually file — Making Tax Digital for VAT if you are registered, and Making Tax Digital for Income Tax if you are a sole trader or landlord in scope. And does the plan you are buying include the feature you need, because MTD Income Tax submissions sit on Pandle’s paid tier rather than its free one.
Step 3: Set up a chart of accounts you will actually use
Your chart of accounts is the list of categories every transaction gets filed under. Every package ships with a default. The default is usually too long.
Trim it to categories that match how you spend and how your tax return is structured. Making Tax Digital for Income Tax uses the same categories of income and expenses as Self Assessment, so aligning to those from day one saves a translation step later.
Rules that keep it usable:
- One category per type of spend. Not “Software”, “Subscriptions” and “IT” doing the same job.
- Separate anything with a different tax treatment. Entertaining is disallowable; staff welfare may not be. Keep them apart.
- Give capital purchases their own home. A £1,200 laptop is not an office cost, it is an asset attracting capital allowances.
- Create a director’s loan account on day one if you run a company. You will need it, and retrofitting one is painful.
If your turnover is below the £90,000 VAT registration threshold, HMRC’s digital record-keeping direction for Making Tax Digital for Income Tax lets you categorise in less detail — recording each transaction simply as income or expense for each source, rather than using the full category list. Residential property finance costs still have to be recorded and reported separately.
Step 4: Fix receipt capture at the point of purchase
The receipt you do not photograph is the deduction you do not claim.
Use your software’s mobile app or a capture tool such as Dext. Photograph at the till, not at the weekend. The image becomes the record.
One point of detail that matters for VAT. VAT Notice 700/22 confirms that if a scanned image contains all the detail required for VAT purposes and is retained, you do not need to keep the original invoice — unless it is required for another purpose. But if you only type selected data from an invoice into your software, you must still keep the original, because your typed entry is not a copy of it.
Some records must be kept in original form regardless. An import VAT certificate (C79) is the standard example.
Step 5: Set a reconciliation rhythm and keep it
Reconciliation is matching your records against the bank until they agree. It is the step that proves the record is complete, and it is the step everyone skips.
Pick a fixed slot — the first Monday of the month, an hour, in the diary. Reconcile the previous month in full. Do not move on while anything is unexplained.
If a transaction has no receipt and you cannot remember it, deal with it now while there is a chance of working it out. In six months there will not be.
Step 6: Know what happens monthly, quarterly and annually
| Frequency | What you do |
|---|---|
| Weekly | Capture receipts, raise invoices, chase overdue payments |
| Monthly | Reconcile the bank in full, review debtors and creditors, run payroll and file the RTI Full Payment Submission on or before payday |
| Quarterly | File the VAT return if registered — due 1 calendar month and 7 days after the period end. File MTD Income Tax quarterly updates if in scope — due 7 August, 7 November, 7 February and 7 May |
| Annually | Year-end adjustments, accounts, Corporation Tax return or Self Assessment, and confirmation statement if you are a company |
Two annual dates worth pinning up if you run a limited company. Accounts are due at Companies House 9 months after the accounting period ends. Corporation tax is payable 9 months and 1 day after the period ends, with the CT600 due 12 months after. The payment deadline arrives roughly three months before the filing deadline, which surprises people every year.
What Making Tax Digital changes for a new business
If you are a sole trader or landlord, check whether you are in scope now or soon.
| Qualifying income | Measured on | Mandated from |
|---|---|---|
| Over £50,000 | 2024/25 | 6 April 2026 — in force now |
| Over £30,000 | 2025/26 | 6 April 2027 |
| Over £20,000 | 2026/27 | 6 April 2028 |
HMRC identifies who is in scope by reviewing your return each year and writes to confirm when you must start. If you are close to a threshold, set up digital record keeping now rather than mid-year.
One more default worth knowing. From the 2024/25 tax year, cash basis is the default method of accounting for sole traders and for partnerships with no corporate partners — you record income and expenses when money actually moves. You must opt out if you want traditional accounting.
Five mistakes that cost the most
Mixing personal and business spending. Every mixed transaction is a decision someone has to make later, and for directors part of it may be a loan account entry with tax consequences.
Leaving bank feed suggestions unchecked. Software guesses categories from previous descriptions. It guesses wrong.
Filing receipts in an email folder. Not a system. Get them into the software.
Ignoring the VAT threshold. Registration is compulsory once taxable turnover passes £90,000 on a rolling 12-month basis. Watch the rolling figure, not the year-to-date.
Waiting until year end. Twelve months of bookkeeping done in January is not bookkeeping. It is archaeology, and it is billed accordingly.
Frequently asked questions
Do I need a separate business bank account?
Limited companies effectively do — GOV.UK states there must be a clear division between the company’s finances and its owners’ and directors’, and a business bank account is the simplest way to achieve it. Sole traders are not legally required to have one, but it makes bookkeeping dramatically easier and is strongly recommended.
What bookkeeping software should a new small business use?
It depends on structure and VAT status. Sage Sole Trader has a free plan for non-VAT-registered sole traders and landlords, and Pandle has a free tier. Xero starts at £7 a month excluding VAT on its Simple plan, or £18 on Ignite once you are VAT registered, and QuickBooks at £10 a month + VAT. FreeAgent is free if you bank with NatWest, Royal Bank of Scotland, Ulster Bank or Mettle. Check the plan is HMRC-recognised for the taxes you actually file.
How often should I do my bookkeeping?
Capture receipts as you go, reconcile the bank monthly without exception, and handle VAT and MTD quarterly updates on their statutory deadlines. Monthly reconciliation is the non-negotiable — it is what proves the record is complete.
What is a chart of accounts?
It is the list of categories every transaction is filed under. Most software ships with a default that is longer than you need. Trim it to categories that reflect how you actually spend, keep anything with a different tax treatment separate, and align it to the Self Assessment categories if you are a sole trader.
When do I need to register for VAT?
Registration is compulsory once your taxable turnover passes £90,000 on a rolling 12-month basis. Track the rolling total rather than the year-to-date figure, because the test looks back over any 12 months, not just your financial year.
Set it up once, properly
SmartFiling can set up and run your bookkeeping on flexible plans — software chosen for your structure, a chart of accounts that matches your tax return, receipt capture configured, and monthly reconciliation done for you. We work with Xero, QuickBooks, FreeAgent, Sage and Dext.
Fixed fees agreed upfront, fully online, no phone calls required.
SmartFiling is the trading name of Ballards Newman (Finchley) Limited, an ICAEW-regulated London practice with over twenty years of UK tax and compliance experience.
