Are you paying too much tax? Self-employed expenses explained

As a self-employed person, you pay tax based on the profit your business makes. By deducting expenses from your profit, you can reduce your overall tax liability – and pay less tax.

Understanding what business expenses you can claim is always a popular topic of conversation on UKBF. There are threads on topics from home office expenses and the difference between invoices vs receipts to fuel rates for electric vans.

But knowing exactly what expenses you’re allowed to claim for can be extremely confusing – and getting it wrong could be costly if HMRC investigates and finds errors in your bookkeeping.

This comprehensive guide explains how the most popular self-employed expenses work. It’s based on the latest HMRC advice and insight from ANNA Money, the no-nonsense team that helps small businesses and startups with their financial admin.

Turnover vs profit​

When you run a business, you’ve got a turnover. That’s all the money you’re bringing in. Alongside that you’ve also got expenses – the cost of running your business.

Your turnover, minus any (allowable) expenses gives you your taxable profit. And this is what you pay taxes on.

So, if your turnover is £45,000 and you claim £9,000 in allowable expenses, you’ve got a taxable profit of £36,000 – and that’s what you pay taxes on.

What are allowable expenses?​

Every business has running costs. Some of these costs can be deducted from your taxable profit. These include:

Office costs​

This ranges from big expenses like the cost of renting an office to smaller things like stationery. It also covers phone, fax and internet bills, postage, printing, printer ink and some computer software.

Rents, rates, power and insurance costs​

This includes rent for your business premises, business and water rates, utility bills, property insurance and security. If you work from home you can claim a proportion of these costs – but only for the parts of your home where your office is based and the time you spend working.

Car, van and travel expenses​

You can claim for vehicle insurance, repairs and servicing, fuel, parking, hire charges, vehicle licence fees, breakdown cover, train, bus, air and taxi fares, hotel rooms and meals when you work away from your normal place of business. Make sure that these are for business-related travel – you can’t claim for non-business driving or travel costs.

Clothing expenses​

This covers uniforms or protective clothing needed for your work, as well as costumes for actors or entertainers. However, you can’t expense your usual clothes, even if you wear them to the office.

Staff expenses​

This includes staff salaries, bonuses, pensions, benefits, agency fees, subcontractors, employer’s National Insurance and training courses (if they’re work-related).

Reselling goods​

This covers goods for resale, raw materials and the direct cost of making goods.

Legal and financial costs​

You can usually claim for the hiring of accountants, solicitors, surveyors and architects for business reasons and also professional insurance premiums. You can also claim for bank, overdraft and credit card charges, interest on bank and business loans, hire purchase interest, leasing payments and alternative finance payments, for example Islamic finance.

Marketing, entertainment and subscriptions​

This includes advertising in newspapers, bulk mail advertising, free samples and website costs.

Training courses​

You can claim for most business courses, particularly if they are refresher courses for skills you already have.

According to HMRC, if you run your own limited company, you need to follow different rules. You can deduct any business costs from your profits before tax. You must also report any items you use personally as a company benefit.

What are capital allowances?​

HMRC defines capital as “assets that you keep to use in your business” and has compiled a detailed guide on the subject. Capital includes things like:

• Equipment
• Machinery
• Business vehicles, for example vans, lorries or cars

If you use traditional accounting, you can claim capital allowances for such assets.

However, most small businesses with an income of £150,000 or less use cash basis reporting. In this case, all capital items – except vehicles – should be included as allowable expenses.

HMRC advice states: “If you use cash basis accounting and buy a car for your business, you can claim this as a capital allowance. However, all other items you buy and keep for your business should be claimed as allowable expenses in the normal way.”

Expenses that are both business and personal​

If an expense is partly for the business and partly non-business, the business part must be separately identifiable. If you can’t clearly show business use compared to personal use, the expense won’t be allowed.

HMRC provides the following example:

Your mobile phone bills for the year total £200. Of this, you spend £130 on personal calls and £70 on business. You can claim for £70 of business expenses.

The difference between capital and revenue expenses​

The definition of what is capital and revenue is a tricky area of tax law. Generally speaking, ‘capital’ is defined as something of enduring benefit to your business.

Something is ‘revenue expenditure’ if it’s:

• An expense incurred as part of producing goods or services that your business provides (stock, materials etc), or:
• An expense incurred on items that are consumed to produce your business profits (energy, rent etc)

To make things even more complicated, something that’s capital for one business might be revenue for another. For example, a van would be a capital expense for a builder but a revenue expense for a van dealer as it would be part of their stock. That’s why you should get professional advice if you’re not sure.

Take care when expensing entertainment and gifts​

There aren’t too many expenses that are specifically disallowed. However, there are a couple of things you need to watch out for: entertainment and gifts (although some small gifts are allowed). Always follow HMRC’s advice on entertainment and gifts.

Simplified expenses​

To work out certain expenses, you will be required to do complex calculations. This is especially true when items are used for business and non-business.

You can avoid using complex calculations by using simplified expenses. These are flat rates that can be used for:

• Vehicles
• Working from home
• Living on your business premises

Keep track of your expenses​

Finally, keep a record of all your business expenses. You don’t need to include proof of your expenses when you submit your tax return, but you may need to show it to HMRC if asked.

Expense Categorisation made simple​

ANNA Money has been specialising in categorising expenses automatically, allowing you to spend more time on growing your business.

Via a secure open banking connection, the ANNA Business Tools app pulls in your banking feed and automatically categorises your outgoing and incoming transactions. The app can also automatically prepare your VAT return based on your transactions and you can submit your VAT return directly to HMRC with just a few clicks.

Automatic expense and income categorisation is just one of many tools from ANNA Money to help business owners to stay on top of their finances.