Accounting online and how this works

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What is UK limited company contractor accounting software? What’s more, how does online accounting work when you are a small UK business owner? When you run your own company or work as a sole trader, you may need to consider what is online accounting for contractors. Basically, all businesses including limited company contractors require a system for their bookkeeping. Indeed, this could be an Excel-type spreadsheet type system. However, if you go online, what is the best bookkeeping software for contractors? What’s more, if you use contractor software (UK) to do your record keeping this can make your updating much easier and save you time. Therefore, it is certainly a good idea to look into the best online accounting software for contractors.

Initial thoughts

Online accounting is still a fairly new way to keep your accounting records as a UK contracting professional. Therefore, as a UK limited company contractor or small business owner, this is something to consider. In addition, the new online method is an alternative to an Excel spreadsheet or paper cashbook, as in years gone by.

Initial considerations 

The types of UK contractor accounting software

There are many choices available out there in respect of online accounting for contractors. Therefore, what is the best accounting software for contractors (UK) on the market? If you find the best one available, you could look to change to this new way of record keeping. What’s more, we are now also in the times of Making Tax Digital (MTD). As a result, MTD is now in place for all of those who are VAT registered. Therefore, it is a key decision for your business to decide whether to choose some great online accounting software (UK). If you do switch to an online package, you can keep your business records online in the future.

Running your contractor limited company

When you run your own business, you need a bookkeeper and an accountant to look after you. They will take care of the bookkeeping and also the annual accounts work. In times gone by, a contractor or small business accountant may have taken care of both of these roles. Unless you did your own bookkeeping, many contractors sent invoices and receipts to their accountants. From this, the accountant would then complete the bookkeeping and file the VAT.

However, now there us the option of small business accounting software for contractors. When you use online software, you can now have better oversight of the company’s records. In addition, the accountant can see this too and look after the more complex areas for you. These will include the accounts and tax prep. work as well as the filing with the UK authorities.

The types of bookkeeping systems

In recent years, some contractor accountants have offered a choice of two systems in the main. The first is an Excel spreadsheet which works well and still does now. The second choice is that of contractor bookkeeping software. This would be through an online portal that would keep your records digitally.

Therefore, what is online accounting, and how does this work? Basically, online accounting is a new way to keep your records. Indeed, this method uses digital software to keep the business records and they are stored online. Therefore, many small business owners will now do their accounting via a digital platform. As a result, if you keep your records online via a contractor software for small business package this will make it easier to complete data entry. In addition, it will also be easier to do the constant updates on an ongoing basis and save you time. FreeAgent is a popular choice of online system for UK contractors and small businesses. In fact, many of these will regard this as the best online accounting software for contractors in the UK.

A new era

In 2023, we are now in the times where MTD is here to stay. HM Revenue & Customs (HMRC) first brought this in for businesses that were VAT registered and above the VAT threshold. In addition, they also gave additional time for businesses to adapt to MTD. This was so that some could continue with spreadsheets and use a unique software tool to file their VAT with HMRC. Now, all VAT-registered businesses should use an online software package that complies with MTD. Therefore, this is where contractor VAT digital software now comes in for those who are in the UK contracting industry.

Most online digital platforms have a license fee. They charge this when you use their contractor small business software. Furthermore, the typical charge for this is between £10 and £30 per month. What’s more, most platforms will also offer a free trial which allows you to test this out before you sign up. However, there are also some less-familiar free options out there which will provide basic plans. These plans will cover your business up to a certain number of transactions per annum. Therefore, what is the best small business accounting software for contractors?

Online contractor accounting software (UK) and what to consider

The best online digital platforms

If you choose online accounting for contractors, you will need to look for an accounting software specialist provider. Examples of some of the best online accounting software for contractors are:

FreeAgent This is some specialist small business accounting software. It is ideal accounting software for IT contractors as well as contractors in other industries. What’s more, it is also ideal for many other small businesses too. Indeed, many professionals regard FreeAgent as the best contractor accounting software out there. In fact, thousands of contractors around the UK will use this probably more than any other online platform. Therefore, this is currently regarded as the best online accounting software for contractors (UK).
Sage This is a package for businesses of all sizes. Many of the larger companies will use Sage be they limited companies, partnerships or sole traders.
Xero This a package for businesses of all sizes. However, this is a bit more technical to use. Therefore, it is more suitable for larger enterprises.
Zoho Book This is not as popular as some of the others, however some contractors and small businesses use this.
Quickbooks Online These have been around for probably the longest. Certainly, the software is good for many types of business although it is not necessarily a preferred contractor option.

Micro business

The term micro business is given to small businesses in the UK. What’s more, this term will include UK contractors and freelancers. The software solutions that we mention above will be sufficient for most small and medium business. However, there are some solutions out there which offer an online accounting system which is free. These will let you sign up if your business has very few financial transactions. In addition, this option of free accounting software will enable a business to use online accounting instead of completing spreadsheets. A couple of examples of free software are:

  • QuickFile
  • Google Sheets.

As we mention above, you might want to take the time to look into one of these options if your company is not actively trading. As an alternative, you could also look into one of these options if you have very few transactions through your business at the present time.

The pros of online contractor accounting software for your business

Initial advantages

When we investigate what is online accounting for contractors, there are lots of great features to test out and use. If you run your own company and you use online accounting, the best packages have lots of different types of accounting features. Therefore, these will include:

  • You have an overview of your business finances and its cash flow.
  • There is an automatic bank reconciliation. Indeed, this is great compared to previous times when you would need to do this on a manual basis while completing your spreadsheets. However, this feature assumes that you have your bank connection correctly set up.
  • Most of the well-known software platforms will allow accounting in multiple currencies. For example, you may have a Euro or US Dollar account.
  • You can issue unlimited invoices and there is the facility to set up recurring invoices too. Besides sending invoices, most systems also enable you to track these. Furthermore, they also show when invoices are paid, and which ones are still outstanding.
  • You can keep track of any accounts payable for your suppliers.
  • Most online software packages also include an option for unlimited users. This will enable you to add your employees and any other directors, should you want to.
  • An expense management system which you can use for each employee, should the need arise.
  • Expense tracking for your employees.
  • You can file certain company tax forms via the online platform.

With your contractor accounting software, you will have an overall view of your business’s financial picture. What’s more, when you use online accounting, the system will also show your profit so far in the current year and what funds are in your business. This is helpful when it comes to considering how much dividends your company currently pay.

More advantages -contractor accounting software and online accounting

The main advantages of online accounting software for contractors are:

  • Your company bank account can link up to the online system. As part of this, your business bank data will import automatically into the online system. As an alternative, you can also upload your bank transactions into the portal. What’s more, you may have a company credit card or a personal credit card with which you pay for business transactions. In this case, you can add the credit card account to the online system, and it will also import your transactions from here.
  • You can add expenses that you incur on a personal basis to your online software. Many also now have the option for you to take a photo of the receipt with your smartphone. When you do this, you can upload the expense into your online software.
  • When you do the updates yourself, you will have to classify each entry for income and expenses. In addition, you will also have to do this for other business transactions such as tax payments and payments to you. Furthermore, you will need to choose a VAT rate for each of your transactions. As a result, this is much quicker than entering four or five data fields of data for each entry like you would in a spreadsheet-type system. Therefore, although there may be a small cost for using an online digital platform, it is certainly easier than using spreadsheets. As a result, many non-VAT registered businesses also now use this due to the time saving.

Further advantages 

There are some further advantages of online accounting software for contractors which are as follows:

  • You can create your sales invoices on many of the online systems and send them to your customer or client. Some online packages also allow time tracking for your invoices and this enables you to keep a record of this. As a result, your time can then feed into the invoices which you create on the system. In addition, the platform will also allow you to track which invoices are still unpaid. Therefore, this will help you keep an eye on which invoices are still due so you can chase them up.
  • Some online systems also allow you to record your inventory management. As a result, this will enable you to track any business assets which you purchase.
  • You can file some important company tax returns via the digital platform. This process is much easier than using the HMRC platform, which was the case previously, or indeed filing paper returns which was the case before this.
  • Most importantly, you are in control when you run your own accounts system for your business. In this context, it will feel good to be more in control of the finances yourself. This is when you compare it to sending everything to your accountant to let them deal with it. What’s more, you will have all of the information for your own business readily online. As a result, you can see your business’s financial standing and how its cash flow looks in real-time.

The best features of online contractor accounting software 

Fewer mistakes

There are much fewer mistakes when you use online software for your business. Of course, you will have to make sure that your bank feed is working fine. The feed will also need refreshing from time to time.

Under a spreadsheet service, it is possible to miss entries or transpose the figures. When this happens, it takes time to track such errors down. These types of errors no longer exist when you use an online system. Again, this is providing that you ensure your bank feed is connected and you update this correctly.

Mobile friendly

Most of the popular online accounting software for contractors’ packages now have a mobile app. Therefore, you can view your business position online and on the move.

Mobile viewing is now a growing trend and it is here to stay. Therefore, when you travel by train, bus, or taxi to work, you could do some of the updates on the go. If you update on the go, it will save you from doing this on your laptop or PC, perhaps on an evening or weekend when you get home.

Good online support

There is usually good online support if any queries arise when you use a digital platform. However, most online systems do have good customer service support that helps you solve any issues quickly. FreeAgent will come back to you on any queries the same day in most cases. I.e., this is the case if you ask them a question during the day, rather than in the late afternoon.

Maintain your records

You can keep all your records on an electronic basis as part of an online software package, rather than keeping paper records.

It is key to bear in mind that you will be in good stead should one of the tax authorities need to view your records in the future providing that:

With regard to your receipts, it will also take quite some time to scan all of these into an online system. Therefore, we would advise you to have a mixture of both online and offline records. 

UK contractor accounting software -current digital reporting


After our earlier considerations, what is the best accounting software for contractors? When you use a digital platform for your business, you can currently via most online systems:

  • File your VAT returns to report your sales tax and purchase tax.
  • File your RTI (Real Time Information) which reports the deductions from payroll.

Plans for the future

In the future, it is the aim that a business can also do other tax filings via the online platform. These other filings will include:

  • Formal accounts which include financial reports.

However, most of the above are some way off due to the complexity of such documents. Currently, you can file the UK income tax return via some online packages but only for self-employed people.

For small businesses, and this includes contractors, the best online accounting software for contractors, as mentioned earlier, is a system called FreeAgent.

When we consider the best MTD software for small business (UK), FreeAgent fits this role too. Notably, the system captures all the above filing capabilities and much more. Further to this, the current FreeAgent cost is just under £30 per month, however many contractor accountants can offer this half price. In addition, if you bank with Natwest, RBS or Mettle through your company you can get the software for free as the bank will pay the software licence.

Final thoughts

When we look into what is online accounting for contractors, this is still a fairly new way to keep your business records. In addition, although it is still fairly new, it has its plus points for you as a contracting professional. The system is advancing as we move along, and it aims to become much better in the future.

If you do not use an online software package at present, we have detailed what you should consider if you want to change contractor accountant. One of the things to consider would be that your new accountant uses online accounting software and is familiar with how this works.

Finally, if you sign up for FreeAgent, there is a monthly licence fee cost. As mentioned, this fee is just short of £30 per month. However, some accountants can offer this for you at £15 per month. Furthermore, if you bank with NatWest, RBS, or Mettle, they will cover your FreeAgent licence fee.

Link to Contractor Advice UK group on


Published On: April 6th, 2023 / Categories: Accounting, First timer guide /

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