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Self Employed Allowable Expenses

The information in this section explains the process of allowable expenses for self employed workers. Check what business expenses you can claim if you are working in self employment. Other key topics explain and clarify the main differences between the costs claimable as allowable expenses and those that the self-employed can claim as capital expenses.

SELF EMPLOYED EXPENSES :Being self-employed in business means you will have a variety of running costs.

You can deduct many of these running costs from the turnover if they are ‘allowable expenses‘. The deduction allows you to work out the taxable profit for the business.

For example, let’s say the turnover is £80,000 and you claim £20,000 in allowable expenses.

You would only pay tax on the remainder after the deduction [£80,000 – £20,000 = £60,000]. The remaining amount is the ‘taxable profit‘.

You cannot count everything that you pay for as allowable expenses in self-employment. The deduction must not include money taken from a business to pay for private purchases.

Note: A different set of rules apply if you run a limited company. You would deduct the business costs from the profits before tax. You must also report any item used for personal use as a company benefit.

Self Employed Allowable Expenses for Tax

The most common types of expenses allowed for business taxation purposes include:

  • Advertising, entertainment, and subscriptions (e.g. website costs).
  • Car, van, and travel expenses (e.g. fuel, parking fees, train or bus fares).
  • Clothing expenses (e.g. work uniforms).
  • Legal and financial costs (e.g. bank charges or insurance premiums).
  • Office costs for property, business premises, and equipment (e.g. phone bills, heating, rates, and stationery).
  • Reselling goods (e.g. raw materials and stock items).
  • Staff expenses and costs (e.g. employee bonuses, salaries, agency or subcontractors fees).

Note: Using your £1,000 tax-free ‘trading allowance’ would mean you cannot claim expenses. Contact the Self Assessment helpline at HMRC for further clarification.

Costs Claimable as Capital Allowances

There are two methods of accounting (traditional and cash basis). Those who use the accrual basis of accounting can claim capital allowances on certain items (assets). The asset must be something kept for use in the business, such as:

  • Business vehicles (e.g. company cars, vans, and Lorries)
  • Equipment
  • Plant and Machinery

Note: Using your £1,000 tax-free ‘trading allowance’ would mean you cannot claim capital allowances.

Cash Basis Reporting

Those who use cash basis accounting may buy a car for the business and claim it as a capital allowance. But, it does not apply to all other items you buy and keep for the business. The other items you buy should get claimed as allowable expenses in the usual way.

Using Items for both Business and Personal Reasons

The rules of allowable expenses for self-employment affect items used for personal reasons. Thus, you can only claim the allowable expenses that apply to the business costs.

An Example

The bills for your mobile phone total £300 for the year. You spend £110 of this on personal calls and £190 for business calls.

Thus, in this example you would be able to claim £190 for the business expenses.

Allowable Expenses Working from Home

If you work from home you might be able to claim a proportion of the costs for certain things like:

  • Council Tax
  • Electricity and heating
  • Internet and telephone usage
  • Rent or mortgage interest

In cases like these you must find a reasonable method of dividing the costs. For example, by the rooms used for the business or the time spent working from home.

An Example

Your home has 4 rooms and you use one of the rooms as an office for your work.

Your electricity bill is £800 for the year. We would have to assume that all the rooms use equal amounts of electricity for this example. But, you would be able to claim £200 as allowable expenses [£800 divided by 4 = £200].

What if you work only one day a week from the same home? In this example you could claim £28.57 as allowable expenses for that day [£200 divided by 7].

Using ‘Simplified Expenses’

There is a way to avoid using these kind of complex calculations. Those who qualify can use ‘simplified expenses’ to work out the business expenses. The simplified business expenses for self employed use flat rates for things like:

  • Company vehicles
  • Living at the business premises
  • Working from home

How to Claim Allowable Expenses

You must keep self-employment business records as proof of the expenses you claim for. You will need to add up all the allowable expenses for the full tax year. Then, submit this total amount on a Self Assessment tax return.

There is no need to send in the proof of expenses when submitting your tax return. But, you should keep proof and the records in case HM Revenue and Customs ask to inspect them.

Note: As a self-employed person you must ensure your business records get kept up to date and accurate.

ALSO IN THIS SECTION

List of Claimable Expenses

Check out a section listing items self-employed workers can claim as allowable expenses. It includes things like office costs, clothing, staff, travel, and marketing expenses.

Legal and Financial Costs

Not all legal and professional fees are deductible as business costs for self employed workers. The section lists those that are claimable and the important ones that are not.

Basic Record Keeping for Self Employed

Note: The HMRC video explains more about effective record keeping for people who are self-employed.

Self Employed Allowable Expenses in the United Kingdom