The Orenda guide to self-employed expenses

Guide to self-employed expenses

When you are self-employed, the amount of tax and national insurance you pay is based on your taxable business profits.

Profit is a term that describes all your income less all your business expenses. Therefore by reducing your profit, you are lowering the figure that your tax and national insurance are calculated upon.

Having allowable business expenses as someone who is self-employed is a perfectly legal way for you to pay less tax! But it is very important that you keep track of your income and expenditure, as well as keep copies of all your receipts and invoices.

It won’t be a surprise to learn that HMRC set out strict rules about which expenses you can claim for (allowable business expenses) and which expenses you cannot claim for (disallowable business expenses).

In this guide we aim to help you understand the do’s and don’ts of self-employed business costs and what may or may not be classed as allowable business expenses. Read on to find out more!

Self-employed expenses you can claim

Here is a list of the most common self employed expenses that you can claim.

Allowable vs disallowable self-employed expenses

What is an allowable self-employed expense?

The overarching rule that you should follow when it comes to allowable expenses, is that every expense you claim on your tax return must be wholly and necessarily incurred for business purposes only.

Claiming wrongly could result in investigations, penalties, interest and surprise tax bills.

Allowable expenses are costs that you can claim against your tax bill. Generally speaking, most of the things that you pay for as a direct result of being in business are allowable expenses because you wouldn’t incur them if you were not in business.

What is a disallowable expense?

There are certain expenses, that even though you may pay for as a result of being in business, cannot claimed against your taxes as a business cost.

Some of the expenditure in the table above requires a little more explanation and we have therefore included more detail below for specific expense categories.

Wages & National Insurance (1)

If you pay employees in your business, the cost of their salary or wage can be claimed against your profits, along with employer’s national insurance and pension contributions.

This does not apply to your own wages, i.e. the money you take from the business to live on, this is because as a self-employed person you are taxed on your profits before your salary or wage.

Freelancers & subcontractors (2)

You can claim the costs of any freelancers or subcontractors that you pay to support your business.

However, there are rules around whether an individual performing services is considered employed or self-employed for tax purposes, and we encourage you to review this for each freelancer or subcontractor.

HMRC have created a useful tool that allows you to answer questions based on how your business operates with that individual, in order to determine their employment status.

The tool can be found here.

Stock and Raw Materials (3)

If you are a product based business you will incur costs for purchasing stock items, and you may also incur costs for items required to make your product.

For example if you are a clothing business you will need to buy the clothing item (stock) and then you may need to purchase some dye (raw materials) to create your bespoke clothing item that you then sell in your business.

Home office (4)

If you work from home then you may be eligible to claim for some of your home expenses.

The easiest way to claim your expense is to use a simplified flat-rate amount depending on the number of hours you work at home.

You can claim a flat-rate amount for working from home as an allowable business expense. This is provided you work from home at least 25 hours per month.

The working from home flat rates currently are:

• £10 per month if you work between 25 and 50 hours per month;
• £18 per month if you work between 51 and 100 hours per month;
• £26 per month if you work 101 or more hours per month.

Simplified expenses do not cover the internet and mobile phones. Therefore, make sure you claim separately along with other business expenses, if appropriate.

The flat rate method means you don’t need to keep hold of any receipts.

This makes things a lot easier however, the downside is:

• You can only claim the use of home as office allowance if you work at home for more than 25 hours per week;
• You still need to make a separate claim for business use of your telephone and internet (for which you must keep receipts);
• Whilst this is a super simple method of claiming, you should check whether claiming for actual costs is more beneficial to you.

Alternatively, you can claim an actual portion of your household bills, including your utility bills, mortgage interest (not the capital part) or rent based on the space you are using.

When working out you claim for using your home as an office, you’ll want to consider the following household bills in your calculation:

• Heating
• Electricity
• Rent
• Mortgage interest (not capital)
• Insurance
• Repairs
• Cleaning
• Council tax

Once you have all your actual costs, you’ll need to work out the portion to claim on your taxes.

Here are the steps you need to follow:

1. Count up the number of rooms in your house or apartment;
2. Divide the total costs of the bills by each room (either equally or by floor space);
3. Estimate how much time you spend working in each room across a week;
4. Divide that amount by 7 to get the daily usage;
5. Divide that answer by 24 and then multiply this with your answer from step 2 for the specific room.

A template calculation can be found in our self-employed spreadsheet.

Claiming for your home using actual expenses can be more tax-efficient for some – just make sure that you:

• Keep your utility bills to support your claim should HMRC investigate;
• Apportion the cost of bills according to the floor space of each room, rather than equally (as in step 2 in our example above) if it makes more sense;
• Don’t dedicate a room in your home to your office space. Dual-use is essential, otherwise, you may risk being charged capital gains tax when you sell your home or getting a bill for business rates;
• Check your mortgage, tenancy agreement or lease because there may be clauses preventing you from using your home as an office.

Whether you choose the flat-rate method or actual costs method to claim for your home office, don’t forget you’ll need to claim expenses for additional costs against your self-employed taxes such as:

• Broadband
• Mobile phone
• Desk
• Shelving and storage
• Stationery

Rent, utilities & office maintenance (5)

If you choose to rent business premises, then you can claim:

• Rent/lease payments,
• Business and water rates,
• Lighting,
• Heating,
• Property and contents insurance.

Training courses (6)

Training courses tend to fall into two categories:

1. Training courses to update and improve existing professional skills & qualifications
2. Training courses attended to learn new skills or gain new qualifications

Any training that keeps your existing skills and expertise up to date is an allowable business expense. For example, if you are a hairdresser and attend a course to learn about a new dye product to use on your clients, this would be allowable.

However, if you attend training to learn new skills, this will most likely not be tax-deductible. This is because when you learn a new skill, these costs are considered capital in nature so cannot be expensed on your tax return. For example, a hairdresser that attends a course on how to become a makeup artist, this would be disallowable.

You must retain evidence to support your conclusion on the training course tax deductibility, as HMRC may wish to inspect it.

Business travel (7)

Claiming travel on your taxes can be a complex area.

In general, you can claim travel away from your normal place of work for things like:

• Visiting clients or suppliers for new or existing business
• Overnight business stays
• Travel to training courses that qualify for allowable expenses

Travel outside your normal business commute is known as irregular travel.

For your business travel to be an allowable expense, each journey you undertake must be:

• An irregular journey, outside your normal commute;
• Fully business related and not contain any element of personal travel (also known as a dual purpose trip);
• Not related to a regular contract/agreement with a client.

What is a dual Purpose Trip?

A dual-purpose trip is one that has a personal element to it. For example, where as part of a work trip you sight-see, take your family/friend, or even just stop for a spot of shopping. Consequently your whole trip could be deemed disallowable.

You should keep entirely separate receipts and expenses for the business side of your trip and book anything personal, family or friends related completely separate.

Travel to your normal place of work:

You cannot claim for travel to and from your normal place or places of work e.g. to your office, studio, or co-working space. It must only be travel to a temporary workplace.

A temporary workplace is defined by HMRC as one which you attend that:

• For a limited time only, like a one-off meeting;
• Meets the “40% rule” – that means a workplace where you spend less than 40% of your working time at;
• Is for less than 24 months.

So watch out, if you regularly travel to the same place you may not be able to claim the travel expenses.

Travel costs for irregular journeys that meet the above criteria could include:

• Mileage OR vehicle costs
• Trains
• Flights
• Buses
• Parking
• Taxis
• Hotels
• Subsistence (food)

Taxis

Be aware that HMRC take a dim view of excessive use of taxis, particularly if they appear unnecessary – i.e. it was a very short journey.

Overnight stays

If your business travel includes an overnight stay, then you can claim the cost of this as part of your travel. You can also claim for food & drink that you had to pay for as part of your irregular journey.

You can claim for:

• The cost of travel to the location;
• Accommodation for your overnight stay;
• A reasonable amount for an evening meal and breakfast

HMRC will likely question any excessive claims for expensive hotels or lavish over the top dinners. So, sorry, but staying at the fancy hotel and having fine dining is probably not going to be acceptable!

Mileage or business vehicle (8)

If you use your car for business purposes you will need to decide which is the most tax-efficient method for claiming relief. This will most likely depend on how much travel you do.

The main ways you can claim for using your car for business reasons are:

• Claim business mileage at the rate set by HMRC;
• Buy a car through your business and claim for the business use proportion

Mileage

The mileage rates set by HMRC are set at a rate per mile that contributes to the cost of wear and tear on a vehicle as well as fuel, MOT and servicing. Other car expenses are not tax deductibles such as MOT, repairs and fuel. Therefore you must pay tax on these.

Current rates:

• 45 pence per mile for cars and goods vehicles on the first 10,000 miles travelled (25 pence over 10,000 miles)
• 24 pence per mile for motorcycles
• 4p per mile for fully electric cars

You need to keep a record of all your business journeys, the key things to include are:

• Date of the journey
• Purpose of the journey e.g. to visit a client
• Start location
• End location
• Number of miles

A template mileage log can be found in our self-employed spreadsheet.

To calculate the amount you can claim you apply the rates applicable to the number of miles. For example, if you travelled 11,000 miles for the business you would claim

First 10,000 at 45p per mile = £4,500 plus 1000 at 25p per mile = £250, therefore total claim £4,750.

Business vehicle 

Buying a car through your business may be tax efficient depending on your line of work. However, the way you’ll get tax relief will depend on how you pay for the car and its CO2 emissions.

You are not able to claim for personal expenses, which means you will only ever be able to claim for the business proportion of the car. You need to make sure you can show evidence of how you use your car for business, should HMRC ever investigate.

The easiest method is to assign a % of business use to the vehicle e.g. 80% personal and 20% business.

As a self-employed sole trader, the way you’ll get tax relief on your car is by using Capital Allowances.

Capital allowances are a way of giving you tax relief on more expensive items, like cars, that you keep for a number of years.

You’ll have to claim for a portion of the car cost, depending on its emissions, using Capital Allowances:

• up to 50 g/km – 100% first-year allowance
• 51g/km-110g/km – 18% capital allowances
• 111g/km or more – 8% capital allowances

If you choose to use this method for your new car, then you can also claim for the business proportion of fuel, servicing, insurance and repairs on your vehicle as tax-deductible expenses.

For example, you buy a car for £10,000 and use it for 70% for business. The car has emissions of less than 50 g/km. You can expense the full business amount of the car – £7,000 (£10,000 x 70%) against your taxes in the tax year you buy it.

If the same car had emissions of 120 g/km then you’ll work out the amount you claim as an allowable business expense differently.

Tax Year 1

• Cost of car £10,000
• Claim 8% £800 ( business use claim on your tax return is £560)
• Cost c/fwd £9,200

Tax Year 2

• Cost of b/fwd £9,200
• Claim 8% £736 ( business use claim on your tax return is £589)
• Cost c/fwd £8,464

You’ll then need to keep going year on year until you either sell the car (and need to make a balancing adjustment), or you have claimed for the full amount of the car against your taxes – whichever comes first.

Depending on which car you have in mind the amount you can claim will vary.

We would take care of calculating the capital allowances etc. for you as part of doing your tax return, but if you choose this method for claiming car costs it’s best to have a chat with us beforehand.

Equipment, tools & other assets (9)

You may need to buy items such as:

• Laptops
• Headphones
• Tech items
• Office furniture
• Tools
• Equipment
• Vans
• Cars

Provided they are used for the business you will likely get tax relief for the items. Though depending on the type of purchase, it may be that the way you claim is through capital allowances as opposed to just normal expenditure.

Capital allowances

Capital allowances are a type of tax relief that businesses can claim when they invest in long-term assets. Sometimes known as fixed assets (or capital assets), these are assets which you can reasonably expect to stay in use by the business for longer than 12 months.

Claiming capital allowances means you can deduct part or all of the asset’s value from your profits.

There are different types of capital allowances, with different criteria. In some cases, claiming them means a business can write off the entire cost of buying an asset in one year, making a significant dent in its tax bill.

There are three main categories of capital allowances, which you must use depending on the type of assets you have bought. These three categories exclude cars, which are treated slightly differently.

Here’s how much businesses can claim as a percentage of the cost of the capital asset they have purchased on each tax return:

Main Rate Pool – 18%

• This pool includes things like plant & machinery, equipment and furniture.

Special Rate Pool – 8%

This is a unique category and refers to purchases which are:

• parts of a building considered integral – known as ‘integral features’;
• items with a long life of over 25 years;
• thermal insulation of buildings;
• cars with CO2 emissions of more than 130g/km.

Single Asset Pool – 18% or 8%

• A business can create a single asset pool where an asset has a really short life, but you cannot include in this pool any cars, special rate items (number 2 above) or anything that you use for non-business reasons.

Businesses claim for HMRC capital allowances on cars based on CO2 emissions of the vehicle and whether it is new or second-hand. Refer to business vehicle above for more details.

Annual Investment Allowance

Certain assets purchased to qualify for the annual investment allowance which allows for the cost of the asset to be fully deducted in the year of purchase rather than over the life of the asset.

The Annual Investment Allowance (AIA) is a tax break created by HMRC to encourage spending by businesses. It permits businesses to deduct the full value of certain ‘qualifying assets‘ against their profits before tax in the year they make the purchase, up to a certain limit (currently £1m).

Capital allowances can be complex and we will prepare the required calculations as part of completing your tax return.

Telephone & internet (10)

If you use your mobile and home internet for your business then you can claim a proportion of these costs on your tax return. For example, if your mobile costs £50 per month and you use it 50% for business, you could claim £25 per month as a tax-deductible expense.

Uniform & safety clothing (11)

You can claim the costs of branded uniforms that you have for your business. For example, if you get t-shirts or jumpers with your logo printed on them. However, you cannot claim non-branded uniforms unless they are for safety reasons, for example, steel toe cap boots etc.

Dual-use clothing, like business suits, workout gear, general outfits etc. are not an allowable expense.

The general rule is if you could include anything you wear for work as part of your ‘everyday wardrobe’, even if you choose not to wear them outside of work, these items cannot be claimed as expenses.

That applies even if you have to wear a suit or certain type of clothing to work, you cannot claim the cost of these outfits against your taxes.

Coaches & Consultants (12)

You can claim the cost of a coach or consultant provided the coach or consultant is providing services only related to your business.

For example you might work with a marketing consultant to increase your brand awareness and customer enquiries or similarly you might work with a business coach on streamlining your operational functions or financial position. These would be examples of allowable expenditure.

Be careful though, as life coaching or more general coaching would be considered be not allowable for tax purposes.

Pre-trading expenses (13)

Pre-trade expenses are costs you incur before you start trading. You can usually treat these as if the expenses were incurred on the first day you began trading, so they will be an allowable business expense in your first set of accounts.

The relief is only available if:

• It was incurred in the period 7 years before the commencement of trade
• If it would be allowable if incurred after trading commenced (e.g. entertaining would not be allowed as a pre-trading expense)

Depreciation (14)

Fixed assets, over time, begin to lose value and this decrease in value needs to be reflected in the accounts using depreciation.

Depreciation is the write-off of fixed assets over a set period to reflect the use and eventual depletion in the value of the asset.

We will calculate depreciation when completing your tax return, however, this is not an allowable expense for taxes, instead, relief is gained for the reducing value of the assets through capital allowances.

Contact us at The Orenda Collective today, so we can help you with this.

Entertaining (15)

HMRC classes entertainment as “business entertainment”, when it is provided free of charge to people (customers, suppliers, subcontractors etc.) who are not employees of your business.

It defines entertainment as “hospitality of any kind” and gives examples including:

• food and drink
• accommodation (e.g. hotels)
• theatre and concert tickets
• entry to sporting events and facilities
• entry to clubs and nightclubs
• Gifts
• use of capital assets
• when you provide entertainment or hospitality only for the directors or partners of your business

Entertainment does not qualify for any tax relief.

Medical expenses (physio, chiropractor, massages, doctors fees etc) (16)