It can be difficult to understand your basic allowable expenses when you are a sole trader or freelancer. Expenses can reduce the average sole trader’s tax bill, often significantly, particularly if you haven’t been using them in the right way. If you want to reduce your tax bill, then this is the article for you.
You can claim tax relief on some of the costs of running your business – these costs are known as ‘allowable expenses’. These appear as costs in your business accounts deducted from the profit you pay tax on.
Did you know that if your turnover is £60,000 and you claim £20,000 in allowable expenses, you only pay tax on the remaining £40,000? Here are some of the things you can claim for (*if using cash basis accounting)
Office equipment and tools
Laptops, PCs, printers, and computer software that your business has used for less than two years is something that would be an allowable expense.
Home Office Expenses
It is possible to calculate your allowable expenses using a flat rate based on the hours you work from home each month.
This means you do not have to work out the proportion of personal and business use for your home, for example how much of your utility bills are for business.
You can use simplified expenses if you work for 25 hours or more a month from home. Check if simplified expenses could save your business money here.
Stationery and communications
As well as the usual paper, envelopes, and pens, you can also claim tax relief on postage and printing, including the costs of printer ink and cartridges that you use as part of your business.
This allowance also applies to electronic communications such as business phone, mobile and internet bills, which is great news for businesses who are trading online.
Phone and internet
If you use your phone, mobile and internet for personal and business use, you’ll need to demonstrate a realistic way of dividing the costs and can only claim tax relief on the part for business use. This will also become very important as we pave the way for Making Tax Digital – streaming lining your business account is key.
Unfortunately, if you can’t demonstrate this, you can’t claim tax relief.
Professional and financial services
Did you know that if you use an accountant, lawyer or other professional as part of your business, you can claim tax relief on their fees? This even applies to our services.
You can also claim allowable expenses for the following, providing it is for business use;
- Hiring surveyors and architects
- Tax relief on bank, overdraft and credit card charges on your business accounts, or interest on business loans.
- Hire purchase, lease, or other financial payments for equipment you use in your business.
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 your pension provider will automatically claim.
If you are a higher or additional rate taxpayer, you can claim further tax relief via your self-assessment tax return as the gross amount of the contribution will ‘extend’ your basic rate band; meaning you pay less tax at the higher or additional rate.
Staff and employee costs
You can claim tax relief on;
- Employee and staff salaries
- Staff and employee costs
- Agency fees
- Employer’s National Insurance
If you travel for business, there is a host of expenses you can claim for, including train, bus, taxi, airfares, and accommodation costs.
But these only apply if the primary reason for your journey or stay was for business.
It is common for people to take a trip that combines both business and pleasure. It is important to note that you can only claim tax relief on costs that you can show are separate from the private part of your journey.
If you can’t split up the costs, you can’t claim tax relief on any part.
Car and Mileage allowance
Tax relief can be claimed if you use a vehicle as part of your business. Expenses such as petrol, insurance, and repairs would all be deemed as an allowable expense. You can add up all your motor expenses for the year and work out the separate business element of the total cost.
This can be time consuming, so it is also possible to claim mileage allowance, which is a more simplified way of calculating the costs of running your vehicle.
You can also claim expenses on:
- Breakdown cover
- Hire charges.
Food and clothing
Everybody needs food and clothing but claiming for them on expenses depends on what you’re using them for.
You can claim the cost of your own food and drink when you’re travelling for business. However, the rules are different if you’re an employee (including of your own limited company) or if you’re self-employed.
HMRC doesn’t give a definition of what a “reasonable” expense is in regard to food and drink for the self-employed, however, the guidance on meals for employees says that “elaborate meals with fine wines” are not on a “reasonable scale” (unfortunately!).
If you need to buy a uniform that identifies what you do or if you require special protective clothing in order to do your job, you can claim for that.
If your job role requires a costume for a stage, TV or film performance, then you can claim tax relief on those.
You can also claim expenses if you wash, repair, or replace unform or protective clothing.
Stock and materials
You can claim tax relief on:
- Items that you resell, e.g., stock
- Raw materials that you use to make goods for sale
- Direct costs from producing goods.
Capital allowances are a type of tax relief for businesses. They let you deduct some or all the value of an item from your profits before you pay tax.
You can claim capital allowances on the following (these are known as plant and machinery):
- business vehicles, for example vans, lorries or business cars
As well as plant and machinery, you can also claim capital allowances for:
- renovating business premises in disadvantaged areas of the UK
- extracting minerals
- research and development
- ‘know-how’ (intellectual property about industrial techniques)
- patent rights
- dredging allowances
- structures and buildings
There is a lot of information around capital allowances, and detail that would be more specific to your business needs. For further information on capital allowances, check out the HMRC website here.
Marketing and advertising
Marketing and advertising play an important role in many businesses now. It is possible to claim tax back on the costs of advertising and marketing your business, including costs for hosting, and maintaining your company website.
Membership of a professional trade body or organisation as part of your business would be considered an allowable expense.
If you don’t have many business expenses to claim, you may be entitled to claim the tax free ‘trading allowance’ of £1,000. If your annual gross trading income is £1,000 or less, from one or more trades you may not have to tell HMRC, however there are circumstances when you must register for Self Assessment and declare your income on a tax return, and you must keep full records of this income.
The trading allowance is a tax exemption of up to £1,000 a year for individuals with trading income from:
- casual services, for example, babysitting or gardening
- hiring personal equipment, for example, power tools
If your annual gross income from these is £1,000 or less, you do not need to tell HMRC, unless:
- you cannot use the allowances
- you must register for Self-Assessment and declare your income on a tax return
You must tell HMRC if you have:
- gross trading income over £1,000 – register for Self Assessment
- other gross income over £1,000 up to £2,500 – contact HMRC
- other income over £2,500 – register for Self-Assessment
This allowance does not apply to trading income from a partnership.
If you need help or advice on allowable expenses, or anything else covered in this article, get in touch today by calling 028 9263 4135.
sources: https://www.sage.com/en-gb/, Simple accounting software for UK small businesses – FreeAgent, GOV.UK