Episode 20 — Contractors & Freelancers: Bookkeeping and HMRC Self-Employed Record Keeping

 Published: 14th December 2025

Working as a contractor or freelancer in the UK gives you freedom and flexibility, but it also brings essential financial responsibilities. Whether you’re delivering projects, offering specialist services, or juggling multiple clients, accurate bookkeeping isn’t just an administrative step — it’s a core business function that keeps you compliant with HM Revenue & Customs (HMRC) and prepared for tax reporting.

In this episode of The BookkeepingPackages Podcast, we distil what UK contractors and freelancers need to know about bookkeeping, from recording income and tracking expenses to understanding HMRC expectations and preparing self-assessment returns. With the right financial habits, you can reduce stress, avoid penalties, and focus on growing your business.

Understanding HMRC’s Record-Keeping Requirements

If you’re self-employed as a contractor or freelancer, HMRC expects you to keep detailed, accurate records of your business transactions. These aren’t just helpful for preparing your accounts — they form the legal evidence HMRC may call upon if your tax return is reviewed. HMRC’s official guidance outlines exactly what records you must keep and why they matter. You can review the full guidance here: https://www.gov.uk/self-employed-records/what-records-to-keep GOV.UK

According to HMRC, your records should include all business sales and income, all business expenses, details of capital assets, and any VAT or PAYE records if applicable. These records allow you to calculate profit or loss accurately and substantiate the figures you enter on your Self Assessment tax return. GOV.UK

Keeping accurate books also means you’re ready for HMRC checks. They don’t require you to send records with your tax return, but you must retain them in case they are requested later — typically for at least five years after the 31 January deadline of the relevant tax year. GOV.UK

Recording All Income from Contracts and Projects

Your first bookkeeping priority as a contractor or freelancer is to record every payment you receive for your work. This means capturing:

• Client invoices issued

• Payments received, including dates and amounts

• Any deposits, retainers, or part payments

• Payments made through intermediaries or platforms

Recording income promptly makes your Self Assessment calculations far simpler. It also helps ensure you don’t miss taxable payments that could push you into a higher tax bracket or additional National Insurance contributions.

A best practice is to label each transaction clearly with client names and invoice numbers so you can easily reconcile your accounting records against bank statements.

Tracking Allowable Expenses to Reduce Taxable Profit

One of the biggest benefits of self-employment is the ability to claim allowable expenses — business costs that are wholly and exclusively incurred for the purposes of your contracting or freelance work. To count, these costs must be justifiable to HMRC and backed by receipts or invoices.

Common allowable expenses include:

• Office supplies and equipment

• Software and subscriptions used for business

• Travel costs directly related to client work

• Home office costs (proportionate if you work from home)

• Professional fees and training

Keeping detailed expense records helps reduce your taxable profit by offsetting legitimate business costs against your income. Record everything with supporting documents and include them alongside income entries in your bookkeeping. GOV.UK

Choosing Your Accounting Method

Contractors and freelancers can choose between two basic accounting methods when preparing their books:

• Cash basis accounting: You record income and expenses when the money is actually received or paid — often simpler for smaller businesses.

• Traditional (accruals) accounting: You record income and expenses when the invoice is issued or received — useful if payments don’t align with cash flow timing. GOV.UK

HMRC defaults to the cash basis for many self-employed taxpayers, but you can elect out if you prefer traditional accounting or if your business circumstances require it. Your accounting software should allow you to set and manage the method that best suits your reporting needs. GOV.UK

Keeping Detailed Digital or Paper Records

HMRC accepts both paper and digital records, but digital bookkeeping has become increasingly valuable — not just for compliance, but also for long-term organisation and ease of reporting. Digitising receipts, invoices, bank statements, and other documents means they are easier to retrieve should HMRC request them in a compliance check.

As part of your bookkeeping process, aim to:

• Scan and store receipts electronically

• Use cloud accounting software to synchronise bank feeds

• Label transactions and attach supporting files

• Reconcile accounts monthly to spot errors early

HMRC notes that accurate records help you work out your profit or loss and support the figures you declare on your tax return. They also make it easier to respond to queries or audits if HMRC ever reviews your accounts. GOV.UK

Preparing for Your Self Assessment Return

Once your income and expenses are properly recorded, preparing your Self Assessment tax return becomes significantly easier. You’ll need to summarise:

• Total business income

• Total allowable expenses

• Profit or loss after expenses

• Capital allowances claimed

• Any additional income (e.g., dividends or rental income)

Accurate bookkeeping throughout the year means you don’t have to scramble at year-end to gather information — and it reduces the risk of mistakes that can trigger penalties from HMRC.

Aim to keep your records up to date throughout the tax year so you can file your return on time and minimise stress.

Conclusion — Good Bookkeeping Keeps You in Control

For contractors and freelancers, accurate bookkeeping isn’t optional — it’s a legal and financial foundation for your business success. Recording all income, tracking allowable expenses, choosing an appropriate accounting method, and keeping well-organised records helps you stay compliant with HMRC and make smart decisions about your business.

If you’d like expert support tailored to contractor and freelancer bookkeeping and HMRC compliance, the team at BookkeepingPackages.co.uk is here to help you stay organised and confident.

About the Author
Stuart Kerr is the founder and lead correspondent at BookkeepingPackages.co.uk, where he helps UK small business owners, freelancers, landlords, hospitality operators, and contractors manage their financial admin with clarity. With over a decade of experience in bookkeeping, tax compliance and business finance strategy, Stuart provides practical guidance that empowers professionals to stay compliant and grow with confidence.