Wrestling with your accounts is certainly not the highlight of working for yourself, but getting your finances right is an important part of being self-employed.
Claiming business expenses can help you to cut your tax bill but, knowing what, and how much you can claim for isn’t straightforward. Fortunately, HMRC allow the self employed to use ‘simplified expenses’ to claim certain allowable business expenses without having to make complicated calculations.
Claiming back your business expenses when self-employed
If you are self-employed there are various expenses that you can claim against your tax bill to lower the amount of profit that you have to pay tax on.
However, managing your expenses when you are self employed can be mind-boggling and calculating the costs can be complicated. If I work from home, how much of the electricity bill is personal and how much is for business? How much money should I put away for my tax bill?
Understanding what business running costs you can deduct
When you are self employed you will need to complete a self assessment tax return every year. You can be fined if you make a mistake on your tax return so it’s important you get your figures right.
Many self employed businesses invest in an accountant to handle their financial affairs, however it’s worthwhile having a basic understanding of your business finances.
This includes understanding what business running costs you can legitimately deduct to calculate your taxable profit. You can only claim these costs if they are classified as allowable expenses.
To make your life easier, HMRC provide flat rates as an option to save you spending an unrealistic amount of time making detailed calculations.
What are allowable expenses?
Firstly, what are allowable expenses?
Allowable expenses are classified by HMRC with clearly defined rules. These strict specifications mean that you can only deduct expenses that are vital to the running of your business.
Expenses in this context are running costs. Running costs cover day-to-day things like travel, insurance, office costs, advertising and marketing expenses.
The amount of tax you are required to pay is calculated to include these allowable expenses.
Simplified expenses for sole traders
Simplified expenses are a way of working out the cost of your allowable expenses using a flat rate instead of working out your actual business costs. Choosing this option will save you time and avoid the stress and complications of working out every single business cost.
Simplified expenses can be used by sole traders, and partnerships but not limited companies and business partnerships that involve limited companies.
If you prefer to work out each and every business expense individually, you can simply choose that option instead.
What can simplified expenses be used to calculate?
Simplified expenses can be used to calculate how much you can claim for the following business expenses;
1. Working from home
If you work from home, you can offset your costs and you can work out how much you can claim using a simplified HMRC rate.
With the simplified expenses option you claim the relevant set monthly rate depending on how many hours you work from home.
- If you work from home 25 to 50 hours and you claim £10 per month
- 51 to 100 hours and you can claim £18 per month, and
- More than 101 hours entitles you to claim £26 per month.
This rate does not include internet or telephone costs – these are claimed separately.
Alternatively, you can apportion your home running costs by working out which rooms in your home you use for business, and the percentage of time you spend in them. This is clearly much more complicated and time-consuming, but can be worth it if you spend a lot of time working from home.
You can use simplified expenses to calculate vehicle expenses by using a flat rate for mileage. This includes car, motorcycle and van.
You do not have to use a flat rate for every vehicle in your business.
3. Living in your business premises
This is applicable to businesses such as B&Bs and guesthouses.
You work out the total expenses for the premises, then you then subtract the relevant flat rate. If one person is living in the business premises you can claim £350 per month, if two people are living there you can claim £500.
Other allowable business expenses
Other business expenses considered by HMRC to be allowable, but don’t fall into the simplified expenses scheme, so have no flat rate, include:
- Pension contributions
- Employer National Insurance contributions
- Agency fees
Mobile phone costs
You can claim back some costs if you use a mobile phone for your business. Take a highlighter pen and mark your business use on the itemised bill. Then work out your monthly average cost. Make sure you keep this working out so that HMRC can see evidence if needed.
Business insurance is classified as an allowable expense. This includes professional indemnity insurance and public liability insurance.
Financial and legal expenses
The costs of professionals that you employ to help your business are considered to be allowable:
Subscriptions and trade bodies
Membership to trade bodies and subscriptions to trade publications and professional memberships are also considered to be allowable expenses.
Computers and printers themselves can also be included, but may be classified as capital allowances. Office stationery, printing costs and postage are allowable expenses.
You can’t claim clothing under your expenses unless it is a uniform or protective gear that is essential for work.
For example, a tree surgeon, or a logistics consultant who need to wear protective steel toe-capped boots when working counts as an allowable expense. If you are a self employed business consultant or journalist you can’t claim on your suit.
Stock and materials
Costs from producing your stock can be claimed along with the cost of stock and materials themselves can be claimed as an allowable expense.
You can also claim on the cost of advertising, listings, website costs, and marketing.
There is no doubt that the digital economy makes it easier for those who are self employed to find work and manage finances.
However, it doesn’t make it infallible and one of the most important areas to get right when you are self employed is managing your expenses.
Make sure that you take advantage of simplified expenses if you do not have to time to make calculations accurately and efficiently.
About the author
This article has been written exclusively for ByteStart by Mercer & Hole, chartered accountants based across London & Hertfordshire’.
More help on being self employed
Bytestart is packed with help and guidance on all aspects of starting your own business, try some of our most popular guides;
- Could you cut your tax bill by claiming some of these business expenses?
- A Guide to Bookkeeping for new business owners
- Setting up accounts for a sole trader – A beginner’s guide
- Book-keeping basics every new business owner must know
- Sole Trader Tax – A Guide for start-ups and the newly self employed
- 10 Ways small business owners can pay less tax
- Could you cut your tax bill by claiming some of these business expenses?
- 10 Common Self-Assessment Tax Return mistakes and how to avoid them
- Which types of insurance must your business have?
- Top 10 business planning tips for start-ups
- 21 Costly VAT Mistakes businesses make on their VAT Returns
- 15 Questions to ask before hiring an accountant for your small business
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- How you can use asset finance to grow your business
- How to choose the right business loan
- How to maximise your chances of securing a small business loan
- What to do when the bank says “NO”