Do You Need Accounting Software?
The Honest Answer
You probably need something if you:
- Send invoices to customers
- Need to track what you're owed
- Have business expenses to record
- Need to submit VAT returns
- Want to understand if you're profitable
- Have an accountant who needs your records
A spreadsheet might still work if you:
- Have very few transactions (under 20/month)
- Don't invoice customers (cash business)
- Have simple, predictable expenses
- Are comfortable with manual record-keeping
- Have time to maintain it properly
The Legal Minimum
HMRC requires you to keep records of:
- All sales and income
- All business expenses
- VAT records (if VAT registered)
- PAYE records (if you have employees)
How you keep them is up to you—but Making Tax Digital means most VAT-registered businesses need compatible software.
Understanding Your Options
Invoicing-Only Tools
What they do: Create and send invoices, track payments, chase late payers.
What they don't do: Full bookkeeping, VAT returns, financial reports, expense tracking.
Examples: Invoice Ninja, Zoho Invoice, Wave (invoicing features)
Good for: Freelancers and very small businesses who just need to bill customers.
Cost: £0-15/month
Full Accounting Software
What they do: Everything—invoicing, expenses, bank reconciliation, VAT, reports, payroll (often extra).
Examples: Xero, QuickBooks, FreeAgent, Sage
Good for: Businesses needing proper bookkeeping and financial management.
Cost: £12-40/month
Accountant-Led Solutions
What they do: Your accountant handles everything using their systems.
Good for: Businesses who'd rather pay someone else to deal with it.
Cost: Accountant fees (£50-200/month typically)
The Main Players Compared
Xero
What it is: Cloud accounting software, very popular with UK accountants.
Pricing:
- Starter: £15/month (20 invoices, 5 bills)
- Standard: £30/month (unlimited invoices/bills)
- Premium: £42/month (multi-currency, expenses, projects)
Pros:
- Clean, modern interface
- Excellent app marketplace (1,000+ integrations)
- Most UK accountants use it
- Good bank feeds
- Strong invoicing features
- Unlimited users on all plans
Cons:
- Starter plan very limited
- Gets expensive with add-ons
- Payroll is extra (£5/month + £1/employee)
- Can be complex for simple needs
- No phone support on lower tiers
Best for: Growing businesses, those with accountants, businesses needing integrations.
QuickBooks
What it is: Established accounting software from Intuit, cloud-based.
Pricing:
- Simple Start: £12/month (1 user)
- Essentials: £22/month (3 users, bills)
- Plus: £32/month (5 users, inventory, projects)
Pros:
- Lower starting price than Xero
- Good for beginners
- Built-in payroll options
- Solid mobile app
- Decent integrations
- Good receipt capture
Cons:
- User limits on plans (unlike Xero)
- Interface less polished than Xero
- Fewer UK accountants prefer it
- Can feel cluttered
- Some features US-focused
Best for: Cost-conscious businesses, those managing their own books, sole traders.
FreeAgent
What it is: UK-focused accounting software, popular with freelancers and contractors.
Pricing:
- £19/month (sole trader)
- £24/month (limited company/partnership)
- Free with some business bank accounts (NatWest, RBS, Mettle)
Pros:
- Designed for UK tax system
- Excellent for self-assessment
- Free with some bank accounts
- Simple interface
- Good for contractors (IR35 tools)
- Time tracking built in
Cons:
- Limited for larger businesses
- Fewer integrations than Xero
- Basic inventory features
- Less suitable once you grow
- Not as many accountants use it
Best for: Freelancers, contractors, sole traders, anyone with a compatible bank account.
Sage Accounting
What it is: Cloud version from the established Sage brand.
Pricing:
- Start: £12/month (invoicing, banking)
- Standard: £26/month (quotes, cashflow)
- Plus: £33/month (purchase invoices, inventory)
Pros:
- Trusted brand
- Good for traditional businesses
- Solid basic features
- Reasonable pricing
- UK-focused
Cons:
- Interface feels dated vs competitors
- App ecosystem smaller
- Legacy perception (though cloud version is modern)
- Support can be slow
Best for: Traditional businesses, those familiar with Sage, accountants who prefer it.
Wave
What it is: Free accounting software (ad-supported, payment processing fees).
Pricing:
- Free (core accounting, invoicing)
- Payments: 1.4% + 20p per transaction
Pros:
- Genuinely free
- Unlimited invoicing
- Decent feature set
- No user limits
- Good for very tight budgets
Cons:
- Limited UK bank connections
- Basic reporting
- No VAT MTD submission (major limitation)
- Fewer integrations
- US company (UK support limited)
Best for: Very small businesses, pre-VAT threshold, those who absolutely can't pay.
Quick Comparison
| Software | Starting Price | Best For | VAT MTD | Bank Feeds | Payroll |
|---|---|---|---|---|---|
| Xero | £15/month | Growing businesses | Yes | Excellent | Add-on |
| QuickBooks | £12/month | Self-managed books | Yes | Good | Included (some plans) |
| FreeAgent | £19/month (free with banks) | Freelancers/contractors | Yes | Good | Add-on |
| Sage | £12/month | Traditional businesses | Yes | Good | Add-on |
| Wave | Free | Pre-VAT, very basic | No | Limited | No |
What Features Actually Matter?
Essential (You Need These)
Invoicing
- Create professional invoices
- Track what's paid/outstanding
- Send reminders for late payments
- Accept online payments (card, bank)
Bank Connections
- Automatic import of transactions
- Matching/reconciliation tools
- Real-time cash position
VAT (If Registered)
- MTD-compatible submission
- Automatic VAT calculations
- VAT reports
Basic Reporting
- Profit and loss
- Cash flow
- Aged debtors (who owes you)
Useful (Nice to Have)
Expense Tracking
- Receipt capture via mobile
- Categorisation
- Mileage tracking
Quotes/Estimates
- Create quotes
- Convert to invoices
- Track conversion
Multi-Currency
- Invoice in other currencies
- Automatic conversion
- Handle exchange rates
Projects/Jobs
- Track profitability by project
- Time tracking
- Billable expenses
Often Unnecessary (Don't Pay Extra)
Advanced Inventory
- Most small businesses don't need this
- E-commerce platforms often handle it
- Adds complexity
Complex Multi-Company
- Unless you actually have multiple companies
- Overcomplicates things otherwise
Advanced Reporting
- Standard reports cover most needs
- Custom reports rarely used
- Ask your accountant what they actually need
Common Pitfalls
Pitfall 1: Overbuying
Signing up for Xero Premium when Starter would work. Paying for payroll when you have no employees. Adding apps you don't use.
Reality check: Start with the cheapest plan that meets your needs. Upgrade when you actually need to.
Pitfall 2: Underbuying (Then Migrating)
Starting with a basic tool, then having to migrate everything when you outgrow it. Migration is painful and error-prone.
Better approach: Choose something that can grow with you, even if you start on a basic tier.
Pitfall 3: Ignoring Accountant Preference
Your accountant probably has a preferred system. Fighting this creates friction, extra costs, and errors.
Better approach: Ask your accountant what they recommend before choosing. Their efficiency saves you money.
Pitfall 4: Not Reconciling Regularly
Setting up software, then ignoring it for months. Data becomes a mess. Year-end is a nightmare.
Better approach: 15 minutes weekly to reconcile beats hours of catch-up. Set a recurring reminder.
Pitfall 5: DIY When You Shouldn't
Spending hours on bookkeeping when your time is worth more elsewhere. Making expensive errors.
Reality check: If your hourly rate is £50 and you spend 4 hours monthly on accounts you could outsource for £100, you're losing money.
Pitfall 6: Poor Expense Habits
Not recording expenses, losing receipts, mixing personal and business spending.
Better approach: Separate bank account, capture receipts immediately (mobile app), categorise weekly.
Making the Decision
For Freelancers/Sole Traders
Check first: Do you have NatWest, RBS, or Mettle? FreeAgent is free.
Otherwise: FreeAgent (£19/month) or QuickBooks Simple Start (£12/month)
Why: Simple needs, good self-assessment support, reasonable price.
For Small Limited Companies
Check first: Does your accountant have a preference?
Generally: Xero Standard (£30/month) or QuickBooks Essentials (£22/month)
Why: Full features, accountant-friendly, room to grow.
For Growing/Complex Businesses
Generally: Xero (with relevant apps) or QuickBooks Plus
Why: Integrations, multiple users, project tracking, scalability.
For Pre-Revenue/Very Tight Budget
Consider: Wave (free) or spreadsheet for now
But: Plan to upgrade before VAT threshold. Wave's MTD limitation is significant.
Working With Your Accountant
What They Need From You
- Access to your accounting software (most can access directly)
- Bank statements (often automatic via software)
- Receipts for expenses
- Answers to questions about transactions
- Regular reconciliation (not a year of mess)
What to Ask Them
- Which software do you recommend/support?
- What's included in your fee vs extra?
- How often should I reconcile?
- What records do I need to keep?
- Can you do bookkeeping, or should I/should we hire someone?
Accountant-Inclusive Plans
Some accountants offer packages including software licences:
- Accountant pays for your Xero/QuickBooks
- Often cheaper than paying separately
- Support included
- Ask if this is available
The Bottom Line
For most UK small businesses, the choice comes down to:
FreeAgent if you're a freelancer/contractor (especially if free through your bank)
Xero Standard if you want the safest, most accountant-friendly choice
QuickBooks Essentials if you want to save money and don't need maximum integrations
All three handle invoicing, expenses, VAT, and basic reporting competently. The differences matter less than actually using whatever you choose consistently.
Pick one, set it up properly, reconcile weekly, and let your accountant guide you on the details. The best accounting software is the one you actually use.
