One of the advantages of being self-employed is that you can reduce your tax bill by claiming certain allowable business expenses. If you are self-employed either as a contractor, freelancer or sole trader then you will pay income tax to HMRC on your taxable earnings through “self-assessment”. In this article we will explain the business expenses that you can claim as a self-employed individual.
How claiming business expenses reduces your tax bill
As a self-employed individual you must pay tax to HMRC on your taxable income (income tax). You pay tax only on income that you earn above your personal allowance. The tax-free personal allowance is currently £12,570. How much tax you pay is based on your gross profit less the cost of running your business (i.e. your business expenses). The costs that you can deduct from your gross profit are “tax-deductible” expenses.
For example, if you have a gross profit of £50,000, a personal allowance of £12,570 and tax-deductible expenses of £6,000 then you will pay self-assessment tax only on £31,430. Income tax is paid at the following rates:
|Up to £12,570
|£12,571 to £50,270
|£50,271 to £125,140
Your allowable expenses do not include any money that you take from your business to fund private purchases. It is also important to bear in mind that, if you run your own private limited company, then different tax rules apply. The following sections set out the business expenses that self-employed individuals can claim on tax.
As a self-employed person you can deduct any expenses relating to your office and equipment. Office-related expenses can include any of the following costs:
- Landline phone
- Mobile phone
- Stationery and postage
- Printing (e.g. brochures and other sales merchandise)
- Printer ink cartridges and toner
- Computer software used by your business for less than 2 years and
- Regular payments to renew computer software licences (this applies even if the software has been used for more than 2 years)
One may claim expenses also for business equipment, including computers, printers and software used for over two years, if you use cash basis accounting. If you do not use cash basis accounting then you must instead claim a capital allowance.
The rules make it clear, however, that you cannot claim for any non-business use of your office resources.
You may claim for rent paid on your business premises and any bills. Bills that you may deduct include your bills for business rates, water electricity and gas, along with building and contents insurance and security.
In addition, if you work from home, you may be able to apportion some of the following costs for tax purposes:
- Cost of converting part of your home into an office, including any capital allowances for tools
- Council tax
- Home insurance
- House repairs
- Rent (this applies if your home is rented or mortgaged)
- Telephone and internet
- Utility costs (e.g. electricity and gas) and
- Water rates (if metered)
You may claim expenses for repairs and maintenance of business premises and equipment. You cannot, however, claim expenses or allowances related to buying your premises.
The rules make it very clear, once again, that you cannot claim for any non-business use of your office resources.
Business travel costs
HMRC’s rules allow self-employed individuals to deduct certain business-related travel costs. Allowable business expenses include:
- Hire charges
- Hotel rooms
- Meals for overnight business trips
- Routine servicing
- Train, bus, air and taxi fares
- Vehicle breakdown cover
- Vehicle insurance and
- Vehicle licence fees.
You cannot claim, however, for any of your personal (i.e. non-business) driving or travel costs, any fines that you incur or the cost of travelling from home to work (and vice versa).
If you choose to purchase a vehicle for your business then you may make a claim to HMRC for a capital allowance. This means that you may deduct part of the value of the vehicle from your profits before you pay tax. Under the current rules you can claim either 18% of the car’s value (main rate allowance) or 6% of the car’s value (special rate allowance). There are additional allowances, for example the “100% first-year allowance” for electric vehicles and those with no CO2 emissions. This means that you can claim the full value of the car. The rates apply as follows:
|Description of car
|What you can claim
|New and unused, with CO2 emissions of 0g/km (or the car is electric)
|100% first-year allowances
|Second-hand electric car
|Main rate allowance
|New or second hand, with CO2 emissions of 50g/km or less
|Main rate allowance
|New or second-hand, with CO2 emissions of over 50g/km
|Special rate allowance
If you are unsure whether you may claim for the full or partial value of your car for your business then it is important to seek advice from an accountant.
If you employ staff within your business then you may claim certain business-related expenses that are relevant to their employment. These include:
- Agency fees
- National Insurance
- Subcontractors and
- Training courses.
This does not include the cost of any domestic help or care (e.g. a nanny).
Another employee-related business expense that you may claim is for training. HMRC will allow you to claim the cost of any training for you and your employees as long as it helps to improve your business-related knowledge. For example, if you pay for specialist health and safety or GDPR training then this is a tax-deductible expense. Training course claims can only be made for an existing business and not for a) starting a new business or b) expanding into a new area of business.
Goods and materials
Another business expense that you may claim relates to your goods and materials. You may claim for the cost of any stock (i.e. goods that you intend to sell) and raw materials (to make the goods that you will sell). In addition, any direct costs which you pay to produce the goods that you make can be deducted. It is important to ensure that you do not claim for any goods or materials purchased specifically for your private use. In addition, you cannot claim for the depreciation of equipment which is used to make your goods.
Legal and financial costs
The cost of legal and financial services are also permitted tax-deductible expenses. HMRC will allow you to deduct the cost of:
- The professional services of an accountant, solicitor, surveyor or architect engaged for business reasons
- Any business-related insurance (e.g. professional indemnity insurance or public liability insurance)
- Bank, overdraft and credit card charges
- Interest on business loans
- Hire purchase interest
- Lease payments and
- Alternative finance payments.
You cannot claim, however, for any fine that you incur for breaking the law (e.g. a speeding fine).
Marketing, entertainment and subscriptions
HMRC will allow you to claim your marketing costs, including:
- Advertising (e.g. specialist industry publications, directories, brochures, sales material)
- Bulk mailing
- Free product samples
You cannot claim, however, for the cost of entertaining clients, suppliers and customers or for event hospitality.
You may claim also for the cost of any subscriptions needed for your business. Eligible subscriptions include trade or professional journals and trade body or professional organisation membership. There are subscriptions for which you cannot claim, however, including gym or political party membership or charitable donations.
HMRC will allow you to claim business clothing costs, although the rules for this are quite strict. You cannot claim for personal clothing such as a suit that you wear for work. You may claim, however, for the cost of uniforms and protective clothing or items that are needed for your work, including costumes if you work in the entertainment sector (e.g. as an actor, dancer or stage performer).
What is the tax-free trading allowance?
Individuals who earn up to £1,000 (the tax-free trading allowance) from trading activities in a tax year do not need to report this income to HMRC or pay income tax on it. Any income beyond this threshold must be reported to HMRC and the necessary tax must be paid. It is important to note, however, that you cannot claim any other business expenses or allowances if you also claim the tax-free trading allowance.
Claiming business-related expenses can significantly reduce your taxable income and, hence, your income tax bill. It is nonetheless essential that you adhere to tax rules set out by HMRC to ensure that you are not claiming when you are not entitled to do so. HMRC’s tax rules are notoriously complex, wherefore it is always important to engage the services of a professional who can prepare and file your self-assessment tax return. It is also important to keep all invoices and receipts relating to your business expenses in case HMRC ask you to provide these as evidence.
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