Every penny is a prisoner when you're self-employed. Whether it’s replacing an old laptop or buying new equipment, you've got lots of bills to pay and overheads to meet. That’s why you need to be meticulous when it comes to balancing your books.
But did you know that there are certain business expenses you can deduct from your self-assessment tax bill?
Here, we run through all the allowable expenses you can claim back if you’re self-employed. That way you know you're paying the right amount of tax at the end of the year and you’ll get to keep more of your hard-earned money.
Understanding allowable expenses for self-employed professionals
In an ideal world, it would be much gentler on your wallet if you could deduct all expenses from your business' profits. However, HMRC has very strict rules on what you’re allowed to claim as expenses when you're self-employed, so it pays to get clued up on them before filling out your tax return.
For self-employed expenses to be classed as allowable expenses, they must have been incurred specifically due to the running of your business. That's why it's a good idea to stay organised and keep a record of the invoices entering and leaving your business.
HMRC lets you subtract these costs from your business' profit. So, having a clear understanding of your allowable expenses will ensure you're paying the right amount when submitting your self-assessment tax return at the end of the tax year.
Say for example your self-employed business earned £28,000 in a tax year and your allowable expenses totalled £6000. You'd only need to pay tax on your taxable profit of £22,000 – a considerable saving on your end-of-year bills.
Essential allowable expenses to claim as a self-employed individual
'I'm going self-employed, what can I claim for?' is likely one of the first questions you'll ask yourself about self-employed allowable expenses. Knowing what expenses you can and can't claim for to reduce your self-employed tax bill can be tricky.
Here’s a quick overview:
| Allowable expense | Not allowed |
|---|---|
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Run your own limited company? Then there's different rules you need to follow when it comes to claiming allowable expenses. Read AXA's guide to allowable expenses for limited companies.
For a more complete breakdown on allowable expenses, read the guide below or visit the Government’s breakdown here.
Self-employed allowable expense list
While this list is not exhaustive, it will run through some of the more common allowable expenses that you might claim as a self-employed business.
Office expenses
If you work in a bricks and mortar office outside of your home, you can claim for the office expenses – including stationery, printer ink and postage costs – that are the lifeblood of your business.
You can also claim for business phone calls, line rental and broadband charges. However, you need to work out the proportion you use these for personal and business use so that you can claim the right percentage back. To make splitting your bills easier, it's a good idea to invest in a separate business line or mobile phone.
The cost of office equipment like computers, printers and computer software can also be claimed back as allowable expenses. However, you'll need to claim these as capital allowances if you don't use cash basis accounting.
Travel and accommodation expenses
Own a business car or van to get you from A to B? Vehicle-related costs such as car or van insurance can mount up quickly when you're self-employed. Luckily, there's plenty you can claim back as travel costs to make it a bit less pricey.
Here's what you can claim for:
- Any business travel that's not to your regular place of work. This includes travelling by train, bus, taxi or plane.
- Accommodation and subsistence costs on business trips
- Travel costs between different places of work
- Mileage costs for business purposes
- If you use a vehicle for personal and business use, you'll need to work out what percentage you use for business and claim back the expenses for this only
You can also claim back the cost of your business van insurance if you’re self-employed, as well as repair and servicing costs. To find out how much your insurance could cost, get a quote from AXA now.
Tools and equipment expenses
You can claim back the costs for the small tools and equipment you’d keep for less than two years. This might include things like:
- Small tools and equipment e.g. paint brushes
- Stationery
For equipment you’ll keep for long-term use, for example heavy machinery and professional trade tools, you would claim:
- allowable expenses if you use cash basis accounting
- capital allowances if you use traditional accounting
Premises costs
Whether you're based at home or another premises, when it comes to the bricks and mortar of your business, there are plenty of costs you can claim back as allowable expenses.
Marketing
Investing your hard-earned money into your marketing activities is a great way of getting your name out there and attracting new customers.
Whether you go down the traditional route and advertise in newspapers or through direct mail, or pay to promote your social media posts to grab customers' attention, you'll be glad to know that you can claim back these marketing costs as allowable expenses.
Subscriptions
Signing up to specific trade membership or professional subscription service can also be claimed back as an allowable business expense when you're self-employed.
For example, if you've subscribed to a magazine or journal to keep up to date with the latest goings on and best practices in your industry, you can claim these costs back as allowable expenses. Similarly, if you're a member of a professional trade body or organisation that's related to your business, you can claim these costs back too.
Legal costs
If you invest in legal or professional services, these fees can be claimed back as allowable business expenses.
However, not all legal fees are tax deductible. You can't claim for the legal costs associated with the buying of property and machinery – you can only claim for these costs as capital allowances if you use traditional accounting.
Similarly, if you're fined for failing to adhere to legal rules and regulations, you won't be able to claim these back as allowable expenses.
Financial costs
Bank, overdraft and credit card charges, interest on bank and business loans, hire purchase interest, leasing payments and alternative finance payments can all be claimed back as allowable expenses.
Be aware that if you're using cash basis accounting that you can only claim up to £500 in interest and bank charges.
You can't claim for loan repayments, overdrafts or finance arrangements. And when it comes to customers not paying you, there are rules governing what debt you can and can't claim back as an allowable expense. If you're using traditional accounting, you can claim for money you include in your turnover but will never receive (this is known as bad debts). You can only write off these debts if you're certain they won't be recovered from customers later.
You can't, however, claim for:
- Debts not included in your business' turnover.
- Debts linked to the disposal of fixed assets, including land, buildings and machinery.
- Bad debts that aren't properly calculated. For example, you can't just estimate that your debts are equal to 5% of your turnover.
Insurance costs
Investing in professional indemnity insurance, public liability insurance or employers' liability insurance, is an easy way to protect your business if things take an unexpected turn for the worst.
Securing additional peace of mind is a worthwhile investment. However, you'll be glad to know that you can reduce the damage done to your wallet when purchasing these products as you can claim these back as tax allowable expenses.
Clothing and uniform
You can't claim back the costs of the everyday clothing that you wear for work. However, if you need to wear a particular work uniform or protective clothing, you can include the costs of this an allowable expense.
For example, if you’re an accountant, the suit you wear to the office every day couldn’t be put down as an allowable expense. However, if you’re a construction worker and you need to buy new safety shoes, you could claim these back as an allowable expense.
Staff costs
You've hired the best people in the industry to help push your business forward.
Here are the staff costs you can claim back as allowable expenses:
- Employee salaries
- Employee National Insurance contributions
- Pensions
- Bonuses
- Benefits, including healthcare and dental
- Agency fees
- Subcontractors
However, when it comes to your own salary, National Insurance contributions, Income Tax, pension and life insurance, you can’t claim these allowable business expenses.
Training courses
Looking to hone your skills to keep ahead of the pack? You'll be glad to learn that training costs are tax deductible expenses for the self-employed.
The only stipulation is that the training course must help you expand and improve upon the knowledge and skills related to the bettering of your business. This means that you can't claim back the costs of any training courses that will lead to the expansion of new areas of business.
What expenses can I claim if I work from home?
Working from home gives you the luxury of deciding when and where you work and means you can kiss goodbye to the dreaded daily commute. If your home is the heart of your business, you’re able to claim a percentage of your household costs and utility bills as business expenses. This includes heating, electricity, internet and telephone, mortgage interest or rent and council tax. Because you're using the property for personal use as well, you can't claim your full bill.
You will need to find a fair (and sensible) method for calculating the right proportion. One way to do this is by working out how many rooms are in your home, and what proportion of the time you use your office space for work, and dividing your full annual bills by these to work out a percentage.
An easier option is to use the government's simplified expenses , a flat rate based on the number of hours per month you work from home. This is likely to be less (and less accurate), but will save you time.
And before you start getting down to business, make sure that you've changed your home insurance protection so you've got the cover you need to carry out day-to-day activities.
What are simplified expenses for the self-employed?
Tax can be, well, taxing. We get it. So if you’re thinking this all sounds pretty complicated and you’re in need of a simpler solution, you could be in luck.
Simplified expenses are a way of calculating certain allowable business expenses using flat rates, rather than working out individual costs on a case by case basis. This is an optional way of claiming a return on your taxes, but could save your business time and effort.
Simplified expenses can be used by sole traders and business partnerships that have no companies as partners. They can’t be used by limited companies or business partnerships involving a limited company.
You can only use these simplified flat rates for the business costs for vehicles, if you work from home, or if you’re also living in your business premises. You can find the flat rates for vehicles, working from home, and living at your business premises by using the Government’s simplified expenses checker.
How to claim allowable expenses?
The trick to keeping on top of all the allowable expenses leaving your business is to record everything. As such, spreadsheets are likely to become your best friends.
Keeping accurate records is vital as you could be fined by HMRC for submitting incorrect information. Add up all of your allowable expenses for the tax year and put the total amount on your Self Assessment Tax Return. You don’t need to include proof at this stage, but you need to keep the correct records and produce them if asked by the HMRC.
Another rule of thumb to abide by is to keep the receipts for every purchase you make when running your business. HMRC dictates that receipts must be kept for six years after you've filed your tax return. They could decide to investigate your business' finances at any time within this period, so it's better to be safe than sorry.
For full guidance on how to claim your allowable expenses, including the deadline for claiming, visit GOV.UK
How can I track my allowable expenses?
To stay organised, set aside a specific time each week to make a note of the business expenses that you're liable to receive tax relief on so you don't lose out on any money. Note it all down in a spreadsheet that you continuously update it that way you’re not waiting until the last minute to get everything organised.
If you’ve tried that and you’re struggling to stay on top of things, why not invest in accounting software to make filling out your financial spreadsheets a cinch? Read AXA's guide to accounting software to help make tallying up your self-employed finances simpler.
Not only will keeping organized make the allowable expenses process much simpler but if any of your expenses are queried, you’ll have proof that they’re legitimate – especially handy as HMRC can request proof of expenses up to six years after they’re claimed.
How to claim capital allowances when self-employed?
While your regular allowable expenses are for things that are not business assets such as your business’s day-to-day running costs, items that it’s your trade to buy and sell and interest payments or finance costs for buying assets, there is also a system for claiming expenses for larger assets that your business might acquire called capital allowances.
Similar to allowable expenses, you deduct some or all of the value of an item from your profits before you pay tax. However, capital allowances are usually for much larger items than you would cover under allowable expenses such as:
Many small businesses don’t use capital allowances in their accounting though, because there’s a simpler method available. If you’re a sole trader or partnership and have an income of £150,000 or less a year, you may be able to use a system called cash basis accounting instead.
All of these ways of claiming expenses against you tax will be done on your self-assessment tax return at the end of the tax year. If you’d prefer to use cash basis accounting, you can read more about it on the UK Government website here.
Can I claim expenses without a receipt?
Whether or not you’ll be able to claim allowable expenses without a receipt will depend on the VAT status of your business. Consider scanning receipts as you get them and storing them digitally so that there’s less risk of losing receipts as time goes on.
For non-VAT registered businesses
If your business is not VAT registered, the rules on this are a bit grey as there is no official amount that required use of a receipt. While this gives a good bit of leeway, it is important to use discretion as HMRC must see the claim as reasonable.
Sometimes, if you’re buying from somewhere like Facebook marketplace or Gumtree, you may not receive a receipt. If this happens – or you’ve just lost a receipt – then you should take down notes on what the purchase was, when the purchase was made, how much it cost, and why there is no receipt available. Other proof of the transactions such as bank statements may also be useful evidence for documenting unreceipted allowable expenses, but this should not be used on a regular basis.
If you’re unable prove or explain your expenses, there’s a chance that HMTC will remove them from your tax deductions.
For VAT registered businesses
If your business is VAT registered, then the rules are a bit stricter. If an expense is over £25 then there must be a VAT receipt otherwise you are unlikely to be able to claim that expense. For those under £25 it is still highly recommended you have a valid VAT receipt.
You can read more in the UK Government’s guide to keeping records for your tax return.
Running a business is expensive. Thankfully, claiming back allowable expenses can alleviate some of the financial pressure that goes hand in hand with being self-employed.
By staying organised and keeping accurate records of your expenses, submitting your allowable expenses returns to HMRC should be a breeze. But if you're ever unsure what you're required to submit, the best thing to do is get in touch with HMRC directly for advice. That way you'll know you've done everything by the book and won't be blindsided by any surprise penalties.
All links are checked and valid at time of publishing, 8 June 2023.
