Self-employment tax deductions: WHAT Expenses you can claim?
If you're a sole trader, you may be able to deduct expenses from your tax bill. How to claim and what costs qualify.
Self-employed individuals can reduce their tax bills by claiming allowable expenses.
How can your business claim back money? We explain in this article.
Our topics include:
Claiming business expenses as income tax relief can reduce your tax bill
Even if you pay an accountant to do your tax returns, it's essential to understand your basic allowable expenses as a sole trader or freelancer.
HMRC calls these expenses allowable expenses, and you can claim them for tax purposes. In your business accounts, these appear as costs deducted from profits.
An average sole trader can reduce their tax bill by a significant amount by deducting expenses.
By claiming £20,000 in allowable expenses on your £80,000 turnover, you only pay tax on the remaining £60,000.
Using simplified expenses is also an option.
In the case of vehicles, working from home, and living on your business premises, these flat rates allow you to calculate tax relief quickly. Your expenses can be much easier to track with it.
Expenses you can claim if you are self-employed and if you rent out a property can be found on the Gov.uk website.
Expenses for self-employment
Here are some of the things you can claim. Since traditional accounting rules can differ slightly from cash basis accounting, we're assuming you're using cash basis accounting.
These figures can be included in your Self Assessment tax return.
Equipment and tools for the office
For equipment that has been used for less than two years, such as laptops, PCs, printers, and computer software, you can claim expenses.
It is not possible to claim tax back on small tools.
Communication materials and stationery
Postage and printing expenses, including ink and cartridges used by your business, can also be claimed, along with the usual paper, envelopes, and pens.
Since more businesses are trading online, this allowance also extends to electronic communications - so you can claim tax back on your business phone, mobile, and internet bills.
Internet and phone service
You can only claim tax back on the part you use for business if you use your phone, mobile, or internet for personal and business purposes.
In the absence of this, you will not be able to claim any tax back.
Services in the professional and financial sectors
As part of your business, you may be able to claim tax back on the fees you pay to an accountant, lawyer, or other professional.
Additionally, you can claim allowable expenses for the hiring of surveyors and architects for your business, but not for improvements to your home.
You can claim tax relief on bank charges, overdrafts, and credit card interest if you have a business bank account.
If you hire purchase, lease, or make other financial payments for equipment you use in your business, you can claim tax back on those payments as well.
Costs associated with employees and staff
Salary, bonuses, pensions, benefits, agency fees, subcontractors, and employer's NI contributions are all subject to tax relief.
The cost of travel
Expenses for train travel, bus travel, taxi travel, airfares, and accommodations can be claimed as allowable business expenses.
If your trip or stay was primarily business-related, then these rules apply.
You can only claim tax relief on business and pleasure-related expenses that are separate from the private portion of your trip.
You can't claim tax relief on any part of the cost if you can't divide it up.
Costs associated with vehicles and cars
Fuel, insurance, and repairs can be claimed as tax benefits if you use a vehicle for business purposes.
Mileage allowance
For self-employed individuals, you can add up all your motor expenses and calculate the separate business element.
Keeping track and figuring this out, however, takes time and effort.
Instead, you can claim mileage allowance, which simplifies the process of calculating your vehicle's running costs.
The following are other vehicle-related expenses you can claim:
Congestion and low-emission zone charges
Parking
Breakdown cover
Hire charges.
Again, tax relief only applies if the expenses are business-related rather than private.
Parking fines and other fines incurred while driving are not tax deductible. Breaking the law does not result in tax relief.
The provision of food and clothing
Food and clothing are necessities, but you can claim them as expenses depending on how you use them.
Clothing
As a general rule, you can't claim clothing if you wear it every day. It's not possible to claim for the cost of a suit you bought for work.
You can, however, claim if you have to buy a uniform or protective clothing that identifies what you do.
Shoes and socks are not eligible for claims.
Tax relief is available if you are an entertainer and the clothes you are buying are costumes for stage, television or film performances.
You'd be surprised how much HMRC enjoys reading your clothing claims, if you're a clown, magician, acrobat or Elvis impersonator.
Laundry
Washing, repairing, or replacing a uniform or protective clothing can be claimed as expenses.
Food
It's only possible to claim money back for food and drink if it's a business expense, such as a trip abroad.
Stock and materials
The following can be claimed as tax deductions:
Items that you resell, such as stock
Raw materials that you use to make goods for sale
Direct costs from producing goods.
Advertisement and marketing
Advertising and marketing costs, including hosting and maintenance costs, can be claimed back as tax deductions.
HMRC considers treating a customer or supplier to lunch as 'entertaining', which is not tax deductible.
You can claim tax relief on membership fees if you are a member of a professional trade association or organization. Claim for subscriptions to trade or professional journals as well.
Contributions to pensions
Pension contributions are not a business expense, so they do not affect your self-employed profits. On your tax return, you can claim tax relief on any contributions you make.
Can I claim home-based expenses?
You may run your businesses from home as a sole trader.
Heating, electricity, council tax and mortgage interest are the only expenses you can claim as tax deductions in this case.
To divide the costs, you'll need to be realistic.
If you work from home or use several rooms for your business, you might divide your bills accordingly.
Is it possible to track the expenses I am allowed to claim?
Keep track of your business expenses throughout the year and keep organized records. You must keep records for five years after the 31 January of the relevant tax year if you are unincorporated or a sole trader.
Spreadsheets are not as accurate and time-saving as accounting software.
You should be able to import expenses and receipts-paper receipts can usually be snapped and captured digitally.
What are the procedures for claiming self-employed business expenses?
Your tax return includes the details of what you can claim back.
Keeping your expenses organized (by adding them to accounting software) will make this process easier.
Ultimately, it is up to you whether to provide a single number for your allowable expenses or a detailed breakdown.
In either case, you should estimate your expenses accurately in case HMRC asks.
The final thoughts on allowable expenses
It can make all the difference to your cash flow if you understand your allowable expenses.
When it comes to filing your taxes, knowing what you can and cannot claim makes the process much easier.
Getting help from an accountant or tax adviser can make all the difference here, even with the expenses we've covered.
It's important to give yourself plenty of time to understand your allowable expenses, consult professionals if necessary, and avoid paying more tax than necessary.
Allowable expense FAQs
Is there a difference between capital and revenue expenses?
A capital expense is an investment in assets you'll use for a long time, whereas a revenue expense is a cost you incur on a daily basis.
To claim the correct amounts, you need to understand the difference.
In order to maintain my allowable expenses, what records do I need to keep?
Keep your business expenses' invoices, bank statements, and receipts. Organize them digitally to simplify tax return preparation.
If I'm audited by HMRC, what happens?
You must provide proof of your allowable expenses if HMRC audits your business. You may be fined or required to pay additional taxes if you do not comply.
What are the allowable expenses for startup costs?
It is possible to consider certain startup costs allowable despite limitations or special rules.
What are the allowable expenses for business insurance?
Premiums for business insurance are allowable expenses.
Are business-related education or training costs deductible?
If you have educational expenses directly related to your current business, you can generally claim them.
The only exception is training costs that qualify you for a new trade.
Is it okay if I have a side hustle? Is it also allowable expense?
Yes, if you have multiple businesses, each can have its own set of allowable expenses. To keep your accounting straight, you'll need to keep these separate.
Do I have the right to claim costs incurred before the official start of my business?
It may be possible to claim some pre-trading expenses, but specific rules and limitations may apply.
Scaling-up businesses have special allowable expenses, right?
Businesses may be able to claim expenses related to business growth (e.g., hiring new employees or moving to a larger office). Some capital expenditures may need to be claimed differently.
Remember as a self-employed individual, you will be personally responsible for your company's debts, so your personal assets could be at risk. However, as a limited company, you enjoy limited liability which protects your personal assets. Treating you completely separate to that of your business. Contact Zyla Accountants today if you’d like the support to get started as a Limited Company.