A Complete Guide to Self-Employed Expenses
Being self-employed is incredibly rewarding. You work for yourself; you can do what you love, steer your company in whichever direction you desire and grow your business. But self-employment isn’t always plain sailing. Unless you happen to be an accountant, the prospect of a tax return and allowable expenses can be daunting.
There are more than five million self-employed workers in the UK, which is over three million more than in 2000. Every year more people than ever are claiming allowable business expenses. But if you’re starting up, it can be difficult to tell the difference between a business cost and a claimable business expense.
To help you with your tax return, we’ve put together this complete guide to self-employed expenses. It gives you a rundown of what allowable expenses are, which costs you can claim and how to claim business expenses.
What Are Self-Employed Expenses?
You can subtract your allowable expenses from your yearly turnover before paying tax when you’re self-employed. An expense is a running cost of your business that is tax-deductible.
For example, if your business turnover was £50,000 and you claim £15,000 in allowable expenses. You will only pay tax on the remaining £35,000. This figure is your taxable profit.
Depending on whether you’re a sole trader or run your own limited company, you will need to follow different rules. But many allowable business expenses apply to both and include:
- Office, property and equipment expenses
- Clothing expenses
- Staff expenses
- Legal and financial expenses
- Marketing expenses
- Travel expenses
There are certain business expenses that you cannot claim. This includes any item you use for your business and personally, like a mobile phone, for a sole trader. For limited companies, any item you use personally and professionally is a company benefit.
HM Revenue and Customs (HMRC) set clear rules about what counts as an allowable expense. These rules are in place so that you can only deduct expenses for your business. Unfortunately, you cannot claim any business costs outside of these rules.
What Self-Employed Expenses Can I Claim?
When the time comes to complete your self-assessment tax return, many running costs will be allowable expenses. But knowing precisely what you can claim from the outset means you can ensure you keep receipts, bills and invoices for any costs and estimate your tax bill.
Office Expenses
Businesses can claim expenses for most office items that the company will use for up to two years. Office expenses include:
- Stationery
- Printing (paper, ink and cartridges)
- Postage
- Phone, fax and internet bills
- Software your business uses for less than two years (or renews a license for)
As well as these, your business can claim for business equipment like computers and printers. But, if you don’t use cash basis accounting, you’ll need to claim these as capital allowances.
Travel Costs
Travel and accommodation expenses cover most business-related car and van costs for your business, including:
- Fuel
- Hire charges
- Repairs
- Breakdown cover
- Vehicle insurance
- Servicing
Calculating your vehicle expenses can be difficult, so the government has made it easy to calculate using simplified expenses. These provide sole traders and business partnerships with a flat-rate cost to save time on calculating vehicle costs.
Alongside any car and van costs, you can also claim for the cost of:
- Business travel
- Hotel and accommodation for overnight business trips
While you can claim travel expenses for your business for external meetings and site visits, you cannot claim the cost of commuting between your home and work. If you make a trip for business and personal reasons, you must separate the business costs to include them in your expenses.
Business Premises Expenses
If you run your business from an office, you can claim certain company costs as business expenses. These include:
- Rent
- Maintenance costs
- Repair costs
- Utility costs such as phone, internet and electricity bill.
- Business property insurance
- Security costs
Allowable expenses are a critical exclusion from buying or building business premises costs.
If you run your business from your own home, business premises expenses are different. You can claim part of your utility bills and council tax in your tax return, but you will need to determine the proportion of your home that you use for your business. For example:
- You have five rooms in your house, and you use one as your business office.
- Your yearly electricity bill is £600, and each room uses the same amount of electricity.
- By dividing the bill by five, you can claim £120 for allowable business expenses.
You can use simplified expenses to work out a flat-rate cost for your working from home expenses and travel costs. To qualify for this, you’ll need to work from home at least 25 hours a month.
Financial and Legal Expenses
Small businesses tend to hire external professionals to handle specific responsibilities. These professions include:
- Accountants
- Legal professionals and solicitors
- Surveyors
- Architects
If your business hires external professionals, then you can include the cost of these in your expenses. But beyond this, you can also include:
- Bank charges
- Overdrafts
- Credit card charges
- Interest on loans
- Leasing payments
- Hire purchase interest
Using traditional accounting, you can claim money that you don’t think you’ll ever receive and include this debt in your turnover.
There are conditions for this, though, that include:
- You cannot claim for debts not included in turnover
- You cannot claim for debts related to the disposal of fixed assets
- You cannot claim any debts that you calculate incorrectly or estimate.
While many business’s legal and financial costs are allowable expenses, you cannot claim for:
- Fines for breaking the law
- The repayment of any bank and business loans, overdrafts or finance arrangements.
Staff Costs
If your business has employees, you can claim staff salaries as part of your allowable expenses. You can also include:
- Staff bonuses
- Pension costs
- Agency fees
- National insurance contributions
- Any training
- Any benefits
Other Tax Allowable Expenses
While we’ve focused on the primary areas of business expenses, there are several other expenses that you and your business can claim, such as:
- Business insurance — You can include the cost of public liability insurance, professional indemnity insurance and employers’ liability insurance in your expenses.
- Marketing — You can claim expenses for the cost of marketing your business, including website costs, advertising, directory listings, free samples and more.
- Clothing — Any uniform costs for your business or protective clothing are allowable expenses. But you are not able to include everyday clothing that you wear to work.
- Stock and materials — If your business produces goods that need raw materials, you can claim the costs that arise from production. You cannot claim any materials bought for private use.
- Subscriptions — If you are a trade body or professional organisation member, you can include the membership fees in your expenses.
How Do I Claim Self-Employed Business Expenses?
Keeping on top of your expenses throughout the tax year is one of the essential elements of self-employment, but it can be challenging to track all your costs. In theory, it should be a simple task to add up your expenses from receipts and bills and subtract that from your turnover. Doing this determines how much tax you need to pay on your taxable profit. In reality, it can be more challenging to track all transactions. To make it as simple as possible, self-employed people should keep copies of all invoices, receipts, and bills.
Calculating Tax Deductible Expenses
There are two ways to calculate your business’s tax-deductible expenses:
- Traditional accounting — You record expenses when you receive a bill or receipt.
- Cash basis accounting — You record expenses when you pay them.
You need to pay any self-assessment tax by 31st January each year. But while the deadline is in January, you can complete your tax return any time after the start of the new tax year on 6th April. It’s a good idea to complete your tax return early so that you can lower the risk of any mistakes and make sure you claim all allowable expenses available to you.
When you complete your return, you can give a single figure for your expenses or choose to provide a detailed breakdown. While providing a single figure is more straightforward, you need to ensure that your calculations are accurate as HMRC can investigate your figures.
Need help with your business expenses and accounting? Try Mint Formations all-inclusive accountancy service today that covers everything from expenses to filing your annual accounts.
