For any sole trader or freelancer, even if your accountant helps produce your tax return, it is beneficial to understand your allowable business expenses as they can often significantly reduce the average tax bill.
The so called ‘allowable expenses’ are legitimate business costs that are deducted from the profit that a sole trader or freelancer pays tax on.
Simplified expenses can also be used. These are flat rates that allow you to quickly calculate tax relief on expenses such as:
- working from home
- vehicles
- living on the business premises
Using the simplified expenses rates can make working out your expenses a much easier task.
Here are the most common claimable expenses for self-employed people as listed on the HMRC website that can be added to your Self-Assessment tax return:
- Office equipment and tools
You can claim expenses for business equipment such as laptops, PCs, printers, and computer software that your business has used for less than two years.
You can’t claim tax back on small tools.
- Stationery and communications
You can reclaim the cost of paper, envelopes and pens, and also postage and printing, including the costs of printer ink and cartridges you use as part of your business.
With more businesses now trading online, this allowance also applies to electronic communications – so you can claim tax back on your business phone, mobile and internet bills.
- Phone and internet
If you use your personal phone, mobile and internet for both personal and business use, you’ll need to demonstrate a realistic way of dividing the costs and can only claim tax back on the part for business use.
However, you must be able to show this.
- Professional and financial services
If you get advice from an accountant or other professional as part of your business, you can claim tax back on their fees.
You can also claim allowable expenses for hiring surveyors and architects for your business but not for 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 tax back on hire purchase, lease, or other financial payments for equipment you use in your business.
- Staff and employee costs
You can claim tax relief on employee and staff salaries, bonuses, benefits, staff and employee costs, agency fees, subcontractors, and of course the employer’s National Insurance and employer’s Auto Enrolment pension contributions.
- Travel costs
You can claim allowable expenses if you need to travel for business, including train, bus, taxi, airfares, and accommodation costs.
However, the primary reason for your journey or stay must have been for business purposes.
If you take a trip that combines business and pleasure, you can only claim tax relief on costs you can show are separate from the private part of your journey.
You must clearly be able to show the split of the personal and business cost.
- Car and vehicle costs
If you use a vehicle as part of your business, you can claim tax relief for expenses such as petrol, insurance, and repairs.
- Mileage allowance
As a self-employed person, you can add up all your motor expenses for the year and work out the separate business element of the total cost.
Keeping track and working this out takes time and effort. Instead, you can claim mileage allowance as a simplified expense that lets you calculate the costs of running your vehicle.
Other vehicle-related areas you can claim expenses on include:
- Congestion and low-emission zone charges
- Parking
- Breakdown cover
- Hire charges.
- Again, tax relief only applies to these if they are business rather than private expenses.
- You can’t claim tax back on parking fines or other fines incurred while driving. There’s no tax relief for breaking the law.
- Food
Claiming for food on expenses is limited. You can only claim money back on food and drink if it’s a business expense, meaning it must be outside your usual working routine, such as a business trip.
- Clothing
As a general rule, you can’t claim for clothing if you’d wear it as part of an everyday wardrobe. So, even if you’ve bought a suit for work, you can’t claim for its cost.
But, if you must buy a uniform that identifies what you do or needs special protective clothing to do your job, you can claim for that.
You can’t claim for non-uniform items such as shoes and socks.
If you’re an entertainer, and the clothes you’re buying are a costume for a stage, TV or film performance, then you can claim tax relief on those.
- Laundry
If you wear a uniform or special protective clothing, you can claim expenses if you wash, repair, or replace it.
- Stock and materials
You can claim tax back on the following:
- Items that you resell, such as stock
- Raw materials that you use to make goods for sale
- Direct costs from producing goods.
- Marketing and advertising
You can claim tax back on the costs of advertising and marketing your business, including costs for hosting and maintaining your company website.
You may think that treating a customer or supplier to lunch is a marketing expense, but HMRC considers it as ‘entertaining’, which you can’t claim tax back for.
If you’re a member of a professional trade body or organisation as part of your business, you can claim tax relief on your membership fees. Subscriptions to trade or professional journals are also allowable expenses, so do claim for those.
- Pension contributions
Contributions to your pension are not a business expense, so they don’t affect your self-employed profits. However, you are eligible for tax relief on any contributions you make, which you can claim on your tax return.
Claimable working from home expenses
Many sole traders and freelancers run their businesses from home, but you can only claim tax back on the proportion of those expenses that relate to the space you use for your business. For example, heating, electricity, council tax and mortgage interest. However, you will need to find a realistic way of dividing the costs. One way is to divide your bills according to the number of rooms you use for your business or your time working from home.
How do I track my allowable expenses?
Keeping organised records and tracking your business expenses is a must. If you are unincorporated or a sole trader, you must keep records for five years after 31 January of the relevant tax year.
Using an accounting software such as Sage Business Cloud Accounting or Sage 50 Accounts saves time and is far more accurate than spreadsheets. If you are VAT registered, you can no longer submit manual VAT Returns so using an accounting software is a must.
If you have paper receipts, Sage Business Cloud Accounting and Sage 50 Cloud Accounts allow you to capture them digitally.
How to claim self-employed business expenses
Working out what you can claim back to enable you to add the details to your tax return will be easier using Sage Business Cloud Accounting and Sage 50 Cloud Accounts and much more organised. Both solutions will give you a single figure for allowable expenses and will provide a detailed breakdown on your tax and VAT return.
Accurately recording and working out your expenses is vital in case HMRC come back with questions about how you have arrived at your calculations.
Final thoughts on allowable expenses
Knowing what you can and can’t claim back makes things much easier at tax return preparation time. Understanding allowable expenses can also make a huge difference to your cash flow.
Some key expenses that you can claim back have been detailed above but getting support from an accountant or tax adviser can make all the difference.
Once you have started to use accounting solutions such as Sage Business Cloud Accounting and Sage 50 Cloud Accounts, you will be surprised how easy it is to regularly enter transactions instead of waiting until your year end to catch up on a whole year’s sales invoices and costs.
Why not get in touch to see how we can help you choose the right solution for your business and show you how to easily setup and use it regularly.
Give yourself plenty of time to understand your allowable expenses, seek advice from an expert if needed, and ensure you don’t have to pay more tax than is required.
Frequently asked questions
Capital or revenue expenses?
- Capital expenses are investments in assets that will benefit your business over a long period,
- Revenue expenses are day-to-day costs.
Understand the difference so you can claim the correct amounts.
What records do I need to keep for my allowable expenses?
- Purchase invoices (for example from a supplier for materials)
- Other paper receipts (for example, fuel, postage)
- Bank statements
Organising these digitally and regularly in solutions such as Sage Business Cloud Accounting and Sage 50 Cloud Accounts makes it so much easier at tax return time.
HMRC Audit
If HMRC makes the decision to audit your business, you must provide proof of your allowable expenses. Failure to do so could result in fines or additional tax payments.
Are startup costs considered allowable expenses?
There are limitations and special rules but certain startup costs could be considered allowable expenses.
Is business insurance an allowable expense?
Business insurance premiums can be claimed as an allowable expense.
Can I claim costs for business-related education or training?
Generally, you can claim educational expenses directly related to your current business.
Training costs that qualify you for a new trade would not be allowable.
What if I have more than one business?
If you have multiple business, each business can have its own set of allowable expenses. However, you will need to record transactions for each business separate for accounting purposes.
Costs incurred before the business officially began to trade
You may be able to claim some pre-trading expenses and VAT, but specific rules and limitations apply.
Businesses that are scaling up
Expenses such as hiring new staff or moving to a larger office can be considered allowable expenses. However, you need to claim certain other capital expenditures differently.
This article provides general rather than specific guidance only, no guarantees can be made concerning its suitability for everyone.
The information is valid at the time of publishing and is provided without any warranty of any kind, express or implied. For more specific guidance on your individual circumstances, please take professional advice. No liability will be accepted for any direct, indirect, consequential or incidental loss or damage arising out of or in connection with your use of the information provided.