The best online accounting software for a limited company

Doing your accounts will probably never become your favourite task. But accounting software may make you less prone to wanting to pull your hair out. Even if you’re not a numbers whiz.

Modern online accountancy software is designed with ease of use in mind. It’s also packed with handy time-saving features and can be accessed from anywhere. Provided you have reasonably good WiFi, of course.

The catch is that there’s never been more choice — online accountancy software is a £9.5 billion market. And more choice means more to think about before you decide which accountancy software to go for.

So what are the key things you should consider before whipping out your credit card and buying an accountancy software program?

And, more to the point, why buy accountancy software in the first place?

Why buy accounting software?

There are three compelling reasons to invest in accountancy software:

• It saves time and hassle
• Depending on your tax status, you may need it to comply with HMRC’s rules
• You’ll get better insights into your contracting business’ financial health

Simplifying your book-keeping

As a self-employed contractor, you have to keep a complete, accurate, and readable record of your earnings and expenses. And accountancy software delivers on all three requirements in an easy-to-store format.

All your incoming and outgoing transactions will be dated, explained, and categorised. Even better, everything is in the cloud. Which means you can access your financial data from anywhere and not get overrun by filing cabinets or shoeboxes full of receipts.

Accountancy software also slashes the amount of admin you have to deal with. You can upload bank statements and expense receipts, which saves you hours of manual data input. And the software does all the maths for you, so there’s less chance of making mistakes that could put you at risk of getting fined.

You can also give your accountant access to the software. This means they can pull all the information they need to do your taxes without you having to mail them a boxful of paperwork (or email several large attachments).

Complying with HMRC’s rules

HMRC doesn’t specify what format your financial records should take. As long as they’re complete, accurate, and readable, you could use spreadsheets, a word document, or even a paper notebook (if that’s what you’re most comfortable with).

That said, since 2019, a government initiative called Making Tax Digital has made it a requirement for some self-employed to file their taxes online using HMRC-approved accounting software.

The requirement currently applies only if you’re VAT-registered. The government has shelved plans to extend this to the rest of the self-employed until at least 2021.

But while you might not have to start using accountancy software immediately, Making Tax Digital has been in the works since 2015. So it’s unlikely the government will forget about it.

With this in mind, it’s worth getting comfortable with accountancy software and migrating your finances to the cloud today. That way, you’ll be good and ready when Making Tax Digital gets back on the agenda, and you won’t have to make major changes to how you handle your finances at short notice.

Useful reports at your fingertips

Want to find out what your cash flow is looking like? Where you’re spending most of your money? Or what your balance sheet is looking like?

Online accountancy software can automatically create reports based on your latest data. These help you get a snapshot of your financial health in real time.

Reports may also come in useful for other reasons, for example if you’re applying for a tender or planning to get a loan. This is because tender applications and loan applications may require you to provide a copy of your balance sheet, profit and loss account, or other financial statements.

How to choose the best online accounting software: 5 things to consider

You won’t be surprised to hear that the perfect accounting software doesn’t exist. Every software has its strengths and weaknesses.

This means that your choice will come down to two things:

• Does the software address your needs as a contractor?
• How comfortable are you when using it?

So how do you find out which accountancy software best addresses these two questions?

1. Start with the basics

What do you need from accountancy software?

At the very least, any accountancy software worth its salt should:

• Record and explain all your incoming and outgoing transactions
• Raise invoices
• Do the sums and keep your figures up to date
• Be on HMRC’s list of approved software. This means it’s compliant with Making Tax Digital and can submit your tax return to HMRC for you

Depending on how you do business, some additional features may also be basic to you.

Do you regularly get paid in foreign currencies? You’ll need accountancy software that supports multiple currencies.

Similarly, if you do business as a limited company — as most contractors do — it’s worth investing in accountancy software that has a payroll module. Bonus points if it supports Real Time Information (RTI). This will allow you to issue your payslips and make HMRC submissions with one click.

Every business is different, so it’s worth doing a needs analysis before you start looking at different options. This will help you stay focused on your requirements instead of getting blinded by unnecessary bells and whistles or writing off a product because it lacks features you ultimately won’t use.

2. How good is the VAT module?

While you don’t have to register for VAT unless your annual turnover exceeds £85,000, most contractors register anyway. This is because registering for VAT has many benefits, such as being able to claim VAT back on business expenses.

The downside is that being VAT-registered carries additional reporting requirements. Which means you’ll need accountancy software that can cope with them.

In particular, check if the software can:

• Handle invoice and cash accounting. Invoice accounting — or standard accounting — is when you pay VAT to HMRC as soon as you raise an invoice. Cash accounting is when you pay VAT to HMRC after the customer pays you. You’ll need to choose and stick with one of these two schemes if you’re VAT-registered
• Handle the flat rate VAT scheme. This is where you pay a fixed rate and keep the difference between what customers pay you and what you’ve paid HMRC
• Produce VAT returns. You have to submit VAT returns to HMRC every quarter, so software that creates them for you automatically is a huge timesaver
• Submit VAT returns to HMRC. Aside from being convenient, this is now a requirement under Making Tax Digital

3. How much admin will it save you?

The biggest upside to using accountancy software is that it cuts your admin. So it’s worth checking how much of those tedious, repetitive tasks that make you want to throw your laptop out the window the software puts on autopilot.

Most accountancy software lets you upload bank statements. But what’s even better is if you can connect your bank account to your accounting software, so your transactions are imported automatically and stay up to date.

The big high street banks now connect to most major accountancy software platforms. But if you use a digital-only bank, you’ll have to double-check.

It’s also worth asking:

• Does the accountancy software integrate with other tools you use, for example a mileage tracker, time tracking software, or a data analysis platform?
• Does it make it easy to keep track of outstanding invoices? Some accountancy software — FreeAgent, for instance — will even send automatic payment reminders to your customers for you
• What else can you automate? The more you can automate — through invoice templates, recurring invoices, and dividend vouchers, for instance — the more time you’ll save and the less stressed you’ll be

4. What data do you want?

At a minimum, good accountancy software should produce:

• An estimated tax bill based on your income and expenses to date — great for knowing how much tax you owe so you can save up ahead of time
• Ongoing balance sheet and profit and loss accounts
• A list of aged debtors at 30, 60, and 90 days — this helps you identify and chase late payments
• A list of aged creditors as at 30, 60, and 90 days — great for keeping track of your bills

Most accountancy software will also produce additional reports. These may include:

• Income by customer — great for finding out who your best clients are
• Expenses by vendor — useful for knowing where you’re spending most of your money
• Income by month
• Cashflow
• Comparisons to past years — useful for evaluating your financial performance over time

Aside from being a contractor, you’re a business. And as a business it’s good practice to regularly look at your data and monitor your financial health.

That said, you don’t necessarily need all the reports a certain accountancy software can produce. Figure out which reports you’re most likely to want to look at, and make sure your chosen software can produce them.

5. How easy is the software to use?

Back in the day, you needed to plow through a thick user manual or take a several-weeks-long course just to get to grips with the basics.

Not anymore.

Most online accountancy software broadly follows the same workflow. So while there’s bound to be a small learning curve, figuring out where everything is and doing basic stuff like creating and exporting invoices should be fairly straightforward and intuitive.

That said, you’re going to be living with this software for many years to come, so it doesn’t hurt to be sure. Take a quick tour to see how you like the interface, and check out their support section to see what the help is like. Good accountancy software should have easy-to-understand resources, plus someone you can get in touch with quickly if you get stuck.

Still confused? Don’t be afraid to shop around

Trying to pick the best accountancy software when there are dozens on the market can seem like an uphill struggle. But by thinking carefully about what you’d like to get out of it and making sure you’re comfortable with the interface you’ll be one step closer to making the right choice.

Still unsure?

Most online accountancy software has a 30-day free trial. So sign up, give it a whirl, and see how you like it before you buy.

Want reliable, affordable accountancy software? 

Sign up to FreeAgent and get 10% off for life, plus an additional 10% off every time you refer someone.