If you are self-employed, allowable expenses can reduce your self-assessment tax bill.
In this article we talk about how your business can claim money back.
Here’s what we cover.
Income tax relief. How can you reduce your tax by claiming business expenses?
As a sole trader or freelancer, it’s important to understand your basic allowable expenses, even if you’re paying an accountant to help with your tax return.
You can get tax back on some of the costs of running your business, which HMRC call allowable costs. These appear as expenses in your business accounts, which are deducted from the profits you pay in tax.
The costs can reduce the average sole trader’s tax bill, often significantly.
For example, if your turnover is £80,000 and you claim £20,000 in allowable expenses, you only pay tax on the remaining £60,000 – a significant saving.
You can also take advantage of simplified expenses.
These flat rates allow you to quickly calculate tax benefits for vehicles, working from home and living on your business premises. It can significantly ease your expenses.
On Gov.uk you can find the most common expenses you can claim for the self-employed and the most common expenses you can claim if you rent out a property.
List of allowable self-employed expenses
Below we cover some of the things you can claim for. To reiterate, we’re assuming you’re using cash accounting, as traditional accounting rules may be slightly different.
You can add these figures to your self-assessment tax return.
Office equipment and tools
You can claim expenses for business equipment such as laptops, computers, printers and computer software that your business has used for less than two years.
You cannot claim tax back on small instruments.
Stationery and communications
As well as regular paper, envelopes and pens, you can also claim back tax on postage and printing, including the cost of printer ink and cartridges, that you use as part of your business.
As more businesses now trade online, this allowance also applies to electronic communications, so you can claim back tax on your business phone, mobile phone and internet bills.
Telephone and Internet
If you use your phone, mobile phone and internet for personal and business use, you need to show a realistic way to split the costs and can only claim tax back for business use.
If you can’t show it, you can’t claim any tax back.
Professional and financial services
If you get advice from an accountant, lawyer or other professional as part of your business, you can claim back tax on their fees.
You can also claim allowable expenses for hiring surveyors and architects for your business, rather than personal home improvements.
If you have a business bank account, you can claim tax relief on bank, overdraft and credit card charges or interest on business loans.
You can also claim a tax refund on hire purchase, lease or other finance charges for equipment used in your business.
Your pension contributions are not a business expense, so they do not affect your self-employment earnings. However, you are entitled to tax relief on all payments you make, which your pension provider will automatically claim.
Personnel and employee costs
You can claim tax relief for employee and staff wages, bonuses, pensions, benefits, staff and employee expenses, agency fees, subcontractors and employer National Insurance contributions.
There are a number of allowable expenses you can claim if you need to travel for business, including train, bus, taxi, airfare and accommodation expenses.
But they only apply if the main reason for your travel or stay was for business.
If you go on a trip that combines business and pleasure, you can only claim tax relief for expenses that you can show are separate from the private part of your trip.
If you can’t split the expenses, you can’t claim tax relief on any part.
Car and car expenses
If you use a car as part of your business, you can claim tax relief for expenses such as petrol, insurance and repairs.
As a self-employed person, you can add up all of your motoring expenses for the year and work out a separate business element of the total expenses.
However, following through and working on it takes time and effort.
Instead, you can claim mileage allowance, a simplified cost that allows you to calculate the cost of running your car.
Other vehicle-related areas you can claim expenses on include:
- Parking lot
- Failure coverage
Again, the tax breaks only apply if they are business and not private expenses.
You cannot get a tax refund for parking or other fines incurred while driving. There is no tax exemption for breaking the law.
Food and clothing
Everyone needs food and clothing, but claiming expenses depends on what you use them for.
Generally, you can’t claim a garment if it’s something you would wear as an everyday wardrobe item. So even if you bought a suit for work, you can’t claim its cost.
But, if you need to buy a uniform that identifies what you do or need special protective clothing to do your job, you can claim for it.
You cannot claim non-uniform items such as shoes and socks.
If you are an entertainer and the clothes you buy are costumes for a stage, TV or film performance, you can claim tax relief for them.
Clowns, magicians, acrobats and Elvis impersonators. we bet HMRC enjoy reading your clothing requirements.
If you wear a uniform or special protective clothing, you can claim expenses if you wash, repair or replace it.
You can only claim back food and drink if it’s a business expense, meaning it must be outside of your normal work routine, such as a business trip.
Stocks and materials
You can return the tax.
- Products that you resell, such as inventory
- Raw materials that you use to make products for sale
- Direct costs of production of goods.
Marketing and advertising
You can claim back tax on advertising and marketing expenses for your business, including the cost of hosting and maintaining your company website.
But be careful, you might think that giving a meal to a customer or supplier is ‘marketing’, but HMRC consider it ‘entertainment’ on which you can’t claim tax back.
If you are a member of a professional trade body or organization as part of your business, you can claim tax relief on your membership fees. Subscriptions to trade or professional magazines are also allowable expenses, so claim those as well.
Read more about self-assessment
What expenses can I claim when working from home?
As a sole trader, you can run your business from home.
In this case, you can only get tax back on the proportion of costs that relate to the premises being used for your business, including heating, electricity, council tax and mortgage interest.
You need to find a realistic way to split the costs.
You can split your bills according to the number of rooms you use for your business or the time you work from home.
How can I track my allowable expenses?
You should track your business expenses throughout the year and keep organized records. If you are unincorporated or a sole trader, you must keep records for five years after January 31 of the relevant tax year.
Ideally, you would use accounting software that saves time and is more accurate than using spreadsheets.
It should allow you to import expenses and receipts. if you have paper receipts, you can often cut and draw them digitally.
How do I claim my self-employed business expenses?
You work out what you can claim back and add the details to your tax return.
If you have organized your expenses (adding them to accounting software will help you achieve this), it will facilitate this process.
And finally, it could be giving a single number for your allowable expenses or a detailed breakdown of your tax return.
In any case, you should calculate your costs accurately in case HMRC come back with questions.
Final thoughts on allowable expenses
Understanding allowable expenses can change your cash flow.
If you know what you can and can’t claim back, it makes things a lot easier when it comes to your tax return.
While we’ve covered some of the main expenses you can claim back, getting help from an accountant or tax advisor can make a big difference here.
Give yourself plenty of time to work out your allowable expenses, talk to professionals if necessary and make sure you don’t end up paying more tax than required.
Editor’s Note: This article was first published in December 2019 and has been updated for relevance.
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