A guide to claiming self-employed expenses

Many sole traders and self-employed individuals will know the sinking feeling associated with a bigger-than-expected tax bill all too well. If your employment activity brings in more than £12,570 each year, then you’ll be liable to pay income tax on your earnings, starting at the basic rate of 20% However, the amount you pay each year can be reduced by claiming back allowable business expenses. There are a variety of expenses that are tax-deductible, as outlined below.

What are tax deductible expenses?

HMRC allows you to claim back tax on expenses that are necessary for running your self-employment activity. This usually includes things like travel costs incurred by attending business meetings and money you spend on advertising your products and services.

At the end of the financial year, you will need to add up the total amount you spent on tax-deductible expenses and subtract it from your total income when making a declaration on your self employed tax return.  HMRC will only tax you on the amount you have left over rather than the total before expenses.

Types of tax-deductible expenses

Let’s take a look at the types of expenses that are eligible for this discount. Some of them include:

• Office supplies and equipment: This includes bigger purchases such as computers, printers and photocopiers, but also encompasses paper, stationery and printer ink. You may also be able to claim back tax on software that you have used for at least two years. It’s important to note that if you use cash basis accounting, you’ll be able to claim bigger equipment costs back under expenses, but businesses using traditional accounting should claim them as capital allowances.
• Premises and utilities: If your self-employment activity includes renting business premises that are in no way linked to personal use, you will be able to expense any rent and energy bills you incur. You can also expense maintenance costs, any repairs you have to pay for, and insurance you take out to protect the building.
• Travel and transport: Travel that is necessary for your business can be claimed as an expense as long as it’s not your daily commute. If you’re planning to travel to a client meeting but are also going on to visit family and friends afterwards, your trip will be considered both business and personal. You may still be able to claim tax on a portion of the expenses you incur. If you’re travelling in your own car and aren’t sure how to calculate fuel costs, HMRC has a simplified expenses guide to help you.
• Professional services: You may need to outsource certain tasks to professionals when running a business. Whether you’re hiring a solicitor for drawing up contracts, an accountant to help you manage your books, or a surveyor to assess new premises, you can claim back tax on the fees you pay. You can also include public liability and professional indemnity insurance as tax-deductible expenses.
• Marketing: Regardless of whether your marketing is traditional or digital, you can claim most of the costs associated with it as expenses. This includes advertising costs as well as money your spend on creating promotional materials such as leaflets.
• Raw materials: If you create your own products or require raw materials to perform a service for your customers, these can be expensed. You can also expense stock, tools, equipment and products you need to run your venture.

Tax-free trading allowance

Claiming back expenses isn’t the only way sole traders can save on their tax bills. If you’re only just starting out as a freelancer or are planning to start a side hustle, you may benefit from the tax-free trading allowance. Designed for people earning less than £1000 each year, this allowance means you don’t need to register for or complete a self-assessment as long as your income is below this threshold.

If you aren’t sure whether you’re going to earn more than £1000 in a single tax year, it’s best to register for a self-assessment just in case. You have no obligation to complete it or pay any tax if your income falls below £1000.

Working from home tax relief

A form of tax relief that has been popularised by the pandemic, both employees and self-employed people can claim tax back on expenses incurred by using their homes as an office. Expenses usually include basic utilities such as electricity, internet and rent.

However, it’s important to note that tax can only be claimed back on a certain percentage of these costs, as some of the time these facilities will be for personal use. Calculating the proportion you can claim is often complicated, with some people using the number of rooms they have to come to a ballpark figure. Fortunately, HMRC has a simplified expenses option that allows you to claim working-from-home expenses at a flat rate. For most self-employed people, this will be more than enough.

Start claiming back your expenses today

It’s best to begin claiming tax back on expenses sooner rather than later. Even if your self-assessment isn’t due yet, it’s important to review your financial records and keep track of how many expenses you have and exactly what those expenses are.

Rather than simply tracking the money your business spends so that you can calculate profits, you’ll need to record what you’re spending money on and keep receipts and invoices as well as evidence. You may not need to provide this evidence to HMRC, but in the event that they request it or conduct an audit, it’s important to have it close to hand.

If you have any doubts about claiming back expenses, consult an accountant for greater peace of mind. They will be able to help you manage your income, expenses, cash flow and self-assessment tax return, advising you on how to best save and use your money.