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5 mistakes everybody makes when it comes to self-employed accounting software – and here's how to avoid them
Choosing the right self-employed accounting software makes all the difference, because it defines how smoothly and easily you can run your finances – a task that most of us wouldn't consider to be a fun task, unless we're in the accounting business.
The right software will help you stay organised by logging income and expenses, which is useful from a personal/business point of view to have an overview of your figures, but it also helps you to meet HMRC deadlines and complete your self-assessment on time.
1. Mixing personal and business finances
It's common for self-employed workers to run everything through one single bank account, lumping personal spending and bills with business income and expenses into one messy view. This is often seen among side hustlers and businesses with smaller turnovers, because they don't think it's worth setting up a new account.
This causes some serious problems when it comes to bookkeeping, making it extremely challenging to track business finances accurately and separate deductible expenses.
Given that self-employed workers are required to complete self-assessment returns annually and the Making Tax Digital (MTD) rules are affecting even more sole traders, clear finances are a must.
Thankfully, avoiding this headache is easy. Start by opening a dedicated business account and running it as strictly as you can, avoiding paying for any personal products or services on this card.
The next step is to find self-employed accounting software that integrates with online banking to automatically pull in your transactions so you'll never have to manually search for them and type them in again. If you want to be even smarter, set up rules to automatically categorise merchants and allowable expenses.
2. Choosing software without advanced expense tracking
Many self-employed workers forget about some of the allowable expenses they can use to offset some of their tax liability, and it can be confusing to decipher what exactly is allowable per HMRC's guidance without the advice of a qualified accountant.
Some frequently disregarded expenses include mileage claims for driving your own car to work meetings and events (if they're away from your usual place of work), home office expenses, and other costs associated with travel, including some meals.
Without full expense tracking, your taxable profit increases, and you could end up overpaying HMRC. Thankfully, good accounting software can include automatic expense tracking that figures out whether something can be offset or not.
It's also worth looking for built-in mileage tracking and receipt scanning to take the effort out of logging the finer details.
3. Not using receipt capture tools to their potential
This is slightly related to expense tracking, but we think receipt capture deserves an entire section because it's an often-overlooked feature that many sole traders might already have access to, but they don't use it properly.
Good receipt capturing tools will log transaction details like costs, dates and merchants. But you can also set up rules or let the system decide how to categorise a transaction against HMRC-compliant expenses. Smartphone apps make receipt capturing far easier than having to share files with your computer, because all you need to do is take a picture directly in the app and let AI or OCR handle the rest.
Another mistake people can make on this front is keeping (or rather, losing) paper receipts. The best software will let you store these pictures as attachments, leaving you with proof of purchase or sale for years to come.
4. Forgetting about self-assessment support
The self-assessment is often regarded as something that self-employed workers must do at the end of their tax year, but a lack of preparation makes the entire application more stressful.
Without good self-assessment support, more calculations will be left to you to do manually, potentially putting you at risk of errors that may cost you penalties, especially if you miss deadlines.
The solution is simple. Find self-employed accounting software that estimates your tax automatically so you know how much to set aside each month, and look for HMRC-compliant report generation to make filling in the endless self-assessment categories a breeze.
And remember, if this is your first year of trading, you'll need to register with the HMRC and tell the tax agency you intend to submit a self-assessment.
5. Ignoring cashflow forecasting
It's easy not to consider yourself a fully fledged business if you're a sole trader, but this is the wrong attitude to take, particularly if you're relying on income to cover personal expenses like your mortgage.
Prepare for quiet months, save for tax bills, and budget properly by making sure your accounting data is up-to-date at all times so that you have access to the full picture.
Look for dashboards that show your cash flow to highlight potential issues, future projections to identify whether you're on track to make enough of a salary, and tax liabilities so you're not hit with an unexpected HMRC bill in January and July.
Summary
Self-employed workers are already under a lot of stress, and accounting isn't necessarily always their strong point.
It's easy to brush off finances as a daunting task that you promise yourself you'll come to later, but not staying on top of it can cause you to make mistakes and lead to HMRC investigations and penalties.
The best self-employed accounting tools should give you all the time-saving and accuracy-boosting help you need, but always ensure you're using them to their full potential.
