Updated on: Oct 1, 2023
Do you ever wonder if you’re making the most of your hard-earned money as a self-employed person working in the UK? Are you maximizing your tax deductions and minimizing your tax burden? In this blog post, we will dive into the world of self-employed expenses, exploring the different types of expenses, how to claim them, and the potential pitfalls to avoid. By the end, you’ll be equipped with the knowledge to navigate your expenses like a pro and keep more of your income in your pocket.
We provide an accounting service for self-employed workers in the UK where all of the issues and questions raised below can be handled by us, and we offer our own free accounting software Simplifi. However, if you’re just starting out with a new business or don’t yet have the income to justify being able to pay for your own accountant, then this guide will provide you with enough information to get you underway.
- Maximize your tax deductions by accurately identifying and claiming allowable business expenses.
- Utilise HMRC helpsheets and resources to confidently identify and claim your allowable expenses.
- Compare simplified expenses with actual costs for the most beneficial deductions & stay compliant with HMRC guidelines!
Understanding Allowable Expenses
Knowing which expenses are allowable for tax purposes is of utmost importance for any business owner. Allowable expenses must meet specific criteria, such as being incurred “wholly and exclusively” for business purposes, while actually performing or trying to attract more business. For self-employed business owners, expenses may be paid from their own personal bank account or from a dedicated business bank account.
Moreover, it’s essential to understand the difference between revenue and capital expenses. While capital expenses represent larger investments in assets that last at least a year, revenue expenses are shorter-term and often used up quickly. Mastering the distinction between these types of expenses will enable you to claim them effectively and will ultimately determine what you pay tax on.
Criteria for Allowable Expenses
For an expense to be tax-deductible, it must be “wholly and exclusively incurred” to run the business or generate more business. Examples of allowable expenses include accounting fees, office supplies, office equipment, rent / rates / power / insurance costs for business premises, contractor insurance, travel, clothing such as uniforms or protective clothing, advertising and marketing expenses, legal and professional fees, training courses and associated travel costs, fees for memberships of professional bodies or trade associations, and other costs that are reasonable and necessary for the business.
To ensure you’re claiming all of your allowable expenses, it’s crucial to utilize resources such as HMRC Helpsheets and Resources. By doing so, you can maximize your business success and minimize your tax liabilities.
Revenue Expense vs. Capital Cost
It’s vital to understand the difference between revenue and capital expenses to optimize your tax deductions. Revenue expenses are associated with the day-to-day operations of the business, while capital expenses are geared towards making long-term investments in fixed assets or enhancing the quality of existing ones.
Let me give you an example. Buying toner for your laser printer is a day-to-day cost for your business. It does not last very long, and frequently needs to be replaced. Buying a new Mac Pro costing £7,199 for your new animation business however is a capital purchase. You expect the Mac Pro to last for several years, its expensive, and its a business asset you’ll be able to use for several years to help generate income for your business.
By claiming capital allowances when investing in something to use in your business, you can take advantage of significant tax savings. Knowing the difference between these expenses will help you make the most of the tax benefits available to you.
Identifying and Claiming Allowable Expenses
To optimize your tax deductions, it’s essential to accurately identify and claim allowable business expenses. Utilizing resources such as HMRC’s helpsheet HS222 and additional resources from the Low Incomes Tax Reform Group can provide valuable guidance in this regard.
When reporting expenses to HMRC, ensure you do so through your tax return and maintain detailed records of all expenses. If your turnover is below the VAT threshold of £85,000, you can use the short version of the tax return for convenience.
Properly identifying, claiming, and reporting your allowable expenses helps you minimize your tax burden while staying compliant.
Reporting Expenses to HMRC
Reporting expenses to HMRC accurately is crucial for maintaining compliance and peace of mind. When reporting expenses, do so through your self assessment tax return, and keep detailed records of all expenses to be prepared for any potential enquiries.
If your turnover is below £85,000, you can use the short version of the tax return for convenience. By properly reporting expenses to HMRC, you minimize your tax burden and ensure you are taking advantage of all the tax benefits available to you.
Simplified Expenses and Flat Rate Allowances
Simplified expenses offer an alternative to calculating actual costs for specific types of expenses for sole traders and partnerships. By using simplified expenses, you can quickly calculate your business expenses using flat rates, saving time and effort.
However, it’s essential to compare these flat rates to the actual costs, as claiming the actual costs may sometimes be more beneficial. Understanding the advantages and disadvantages of simplified expenses and flat rate allowances can help you make informed decisions about your tax deductions.
Types of Simplified Expenses
Flat rate allowances are available for three types of expenses if you’re a sole trader or in a partnership. These expenses include business costs for vehicles, business use of your home, and private use of a home phone or broadband.
By taking advantage of flat rate allowances, you can save time and effort calculating your expenses while ensuring you’re compliant with HMRC guidelines.
Comparing Simplified Expenses to Actual Costs
When deciding whether to use simplified expenses or actual costs, it’s essential to compare the amount you can claim using each method. Although simplified expenses can save you time and effort, claiming the actual costs may sometimes result in a more significant tax deduction.
By comparing the two methods, you can make an informed decision that maximizes your tax savings.
Home-Based Business Expenses
For home-based self-employed workers, claiming a proportion of household expenses for business purposes can provide valuable tax deductions. However, it’s crucial to be aware of potential tax liabilities when selling your home, as a portion of any profit may be liable to tax.
Moreover, flat rate allowances are available if you work from home at least 25 hours per month, providing another option for claiming home-based business expenses.
Proportionate Household Expenses
To claim a proportion of household expenses for business purposes, you need to find a reasonable method of dividing the costs. This can include splitting the costs based on the number of rooms used for business or the amount of time spent working from home.
By accurately allocating household expenses, you can maximize your tax deductions and minimize your tax burden.
Potential Tax Liabilities and Selling Your Home
When selling a home that was used for business purposes, it’s essential to be aware of potential tax liabilities. A portion of any profit generated from your house would become liable to tax, if it was used exclusively for business purposes. Remember to keep records of all related costs and income.
To mitigate these liabilities, ensure you keep accurate records of your business use and consult a tax professional for guidance. With appropriate planning and foresight this issue can be avoided.
Vehicle and Travel Expenses
Claiming vehicle and travel expenses is an essential aspect of maximizing your tax deductions as a sole trader. You have the choice of either claiming a proportion of your actual motoring expenses or taking advantage of flat rate expenses based on your business mileage.
Regardless of the method chosen, it’s vital to keep a record of your business miles to ensure compliance with HMRC guidelines.
Actual Motoring Expenses vs. Flat Rate Expenses
When deciding between claiming actual motoring expenses or flat rate expenses, it’s important to weigh the benefits and drawbacks of each option. While actual motoring expenses allow you to claim the full cost of your business vehicle expenses, it can be time-consuming to track and record all the costs.
On the other hand, flat rate expenses offer a simpler and quicker method of claiming expenses based on business miles driven but may not cover the full cost of your business vehicle expenses.
Record-Keeping for Business Mileage
Maintaining accurate records of your business mileage is essential for compliance with HMRC guidelines and maximizing your tax deductions. Strategies for keeping accurate records include maintaining a detailed mileage log or using a mileage tracking app to record the date, starting and ending locations, and purpose of each trip.
By keeping good records, you can ensure you’re properly claiming vehicle and travel expenses on your tax return.
Expenses for Dual-Purpose Items
As a self-employed individual, you may have expenses for items used for both personal and business reasons. To claim these expenses, you need to allocate business costs by finding a reasonable method of dividing the costs between personal and business use.
By accurately allocating business costs for dual-purpose items, you can maximize your tax deductions and minimize your tax burden.
Allocating Business Costs
Allocating business costs involves identifying and assigning costs to specific cost objects, such as products, departments, programs, and jobs. For dual-purpose items, you need to find a reasonable method of dividing costs to ensure that all expenses are fairly accounted for.
Common Dual-Purpose Expenses
Examples of common dual-purpose expenses include electricity when working from home, phone bills, and internet bills. To accurately allocate costs for these items between personal and business use, maintain records of usage and consult available resources, such as this home office calculator, for guidance. Typically, a reasonable method for dividing the cost of a dual-purpose expense will be based on the amount of time spent using it for work vs personal use.
Navigating Disallowable and Personal Expenses
Expenses are not always tax-deductible. Certain expenses may not qualify for tax deductions. Some expenses are disallowable or for personal use, and you must adjust your profits accordingly to ensure compliance with HMRC guidelines. Examples of disallowable expenses include entertaining clients, private travel, and non-business related gifts.
Being aware of disallowable and personal expenses can help you optimize your tax deductions and avoid potential issues with HMRC.
Examples of Disallowable Expenses
Disallowable expenses are expenses that are not related to your business and therefore cannot be claimed as a tax deduction. Some examples of disallowable expenses include expenses with personal benefits, lost or stolen articles, alcoholic beverages, damage to personal vehicle, clothing or other items, movies charged to hotel bills, and insurance such as trip cancellation, personal health, or life insurance.
By avoiding disallowable expenses, you can maximize your tax deductions and maintain compliance with HMRC guidelines.
Adjusting Profits for Disallowable Expenses
To ensure that your profits accurately reflect only allowable expenses, you need to make adjustments to the profit shown in your accounts. Consult resources such as the Self Assessment: Self-employed pages notes for 2022/23 to determine which expenses are allowable and which are disallowable.
By adjusting your profits for disallowable expenses and maintaining accurate records, you can optimize your tax deductions and maintain compliance with HMRC guidelines.
In conclusion, understanding and claiming allowable expenses is crucial for self-employed individuals to minimize their tax burden and maximize their income. By accurately identifying and claiming allowable expenses, utilizing resources such as HMRC helpsheets, and maintaining accurate records, you can optimize your tax deductions and maintain compliance with HMRC guidelines. Remember, every penny saved on taxes is a penny earned for your business, so invest the time and effort to understand your expenses and make the most of your hard-earned income.