The guide to self-employed allowable expenses

Finance and legal

21 January 2020

Every penny is a prisoner when you're self-employed. From overheads to equipment costs, you've got bills to pay and costs to meet, so you need to be meticulous when it comes to balancing your business' books.

But did you know that when completing your self-employed tax return that there are certain business expenses that you can deduct from your tax bill?

Here, we run through all the allowable expenses that you can claim back as a self-employed business owner. That way you can ensure that you're paying the right amount of tax at the end of the year and keep more of your hard-earned money in your pocket.

What are allowable expenses?

In an ideal world, it would be much gentler on your wallet if you could deduct all expenses from your business' profits. However, HMRC have very strict rules on what you’re allowed to claim as expenses when you're self-employed, so it pays to get clued up on them before filling out your tax return.

First and foremost, in order for self-employed expenses to be classed as allowable expenses, they must have been incurred specifically due to the running of your business. That's why it's a good idea to stay organised and keep a record of the invoices entering and leaving your business.

HMRC lets you subtract these costs from your business' profit. This means having a clear understanding of your business' allowable expenses will ensure you're paying the right amount when submitting your self-assessment tax return at the end of the tax year.

Say for example your self-employed business earned £28,000 in a tax year and your allowable expenses totalled £6000. You'd only need to pay tax on your taxable profit of £22,000 – a considerable saving on your end-of-year bills.

What allowable expenses can I claim for when self-employed?

'I'm going self-employed, what can I claim for?' is likely one of the first questions you'll ask yourself about self-employed allowable expenses. Knowing what expenses you can and can't claim for to reduce your self-employed tax bill can be tricky.

Here’s a quick overview:

Allowable expense Not allowed
  • Accountancy fees
  • Accommodation expenses incurred on business travel
  • Bank charges
  • Business assets (like computers and software) and office furniture
  • Business mileage
  • Charity donations
  • Employee costs
  • Entertaining clients or staff
  • Eye tests and glasses
  • Insurance costs
  • Marketing costs
  • Office stationery (paper, postage etc.)
  • Office overheads (including heating, lighting, water rates, business rates)
  • Pension
  • Professional subscriptions
  • Phone and broadband costs
  • The use of your home as an office
  • Stock
  • Training costs
  • Travel and subsistence costs
  • Workwear (including protective clothing and uniforms)
  • Building an office extension
  • Buying a vehicle>
  • Costs of travelling between home and work
  • Your own wages, salary, National Insurance contributions, income tax
  • Your pension costs
  • Your own life insurance

Run your own limited company? Then there's different rules you need to follow when it comes to claiming allowable expenses. Read AXA's guide to allowable expenses for limited companies.

For a more complete breakdown on allowable expenses, read the guide below or visit the Government’s breakdown here.

Office expenses

If you work in a bricks and mortar office outside of your home, you can claim for the office expenses – including stationery, printer ink and postage costs – that are the lifeblood of your business.

You can also claim for business phone calls, line rental and broadband charges. However, you need to work out the proportion you use these for personal and business use so that you can claim the right percentage back. To make splitting your bills easier, it's a good idea to invest in a separate business line or mobile phone.

Costs of business and office equipment like computers, printers and computer software can also be claimed back as allowable expenses. However, you'll need to claim these as capital allowances if you don't use cash basis accounting.

Travel and accommodation expenses

Own a business car or van that you use to get you from A to B? Vehicle-related costs such as car or van insurance can mount up quickly when you're self-employed. Luckily, there's plenty you can claim back as travel costs to make it a bit less pricey.

Here's what you can claim for:

  • Any business travel that's not to your regular place of work. This includes travelling by train, bus, taxi or plane.
  • Accommodation and sustenance costs on business trips
  • Travel costs between different places of work
  • Mileage costs for business purposes
  • If you use a vehicle for personal and business use, you'll need to work out what percentage you use for business and claim back the expenses for this only

You can also claim back the cost of your business van insurance if you’re self-employed, as well as repair and servicing costs. To find out how much your insurance could cost, get a quote from AXA now.

Premises costs

Whether you're based at home or another premises, when it comes to the bricks and mortar of your business, there's plenty of costs you can claim back as allowable expenses.

Self-employed allowable expenses when working from home

Working from the comfort of your own home gives you the luxury of deciding when and where you work and means you can kiss goodbye to the dreaded daily commute. Below are some of the expenses you can claim as allowable expenses as a home-based self-employed worker:

  • Heating
  • Water rates
  • Council tax
  • Cleaning
  • Lighting
  • Office equipment
  • Home insurance
  • Mortgage interest
  • General maintenance costs

However, you won't be able to claim for 100% of your property's bills as allowable expenses if your business is home-based. And before you start getting down to business, make sure that you've changed your home insurance protection to ensure you've got the cover you need to carry out day-to-day activities.

Marketing, entertainment and subscriptions

Investing your hard-earned money into your marketing activities is a great way of getting your business' name out there and attracting new customers.

Whether you decide to advertise in newspapers or directories, use direct mail, give out free samples or use your website to grab customers' attention, you'll be glad to know that you can claim back these marketing costs as allowable expenses.

Entertainment costs

Schmoozing with a free lunch is an easy way to get to know your potential clients, customers or suppliers onboard with your business. But even if you're a hostess with the most-est, sadly you can't claim back the money you spend on hospitality, business entertainment or gifts – such as food, drink or free samples – as allowable expenses.

However, if you're the owner of a limited company there is an exception to this rule and it comes in the tinsel-shrouded form of the annual staff Christmas party.

Whether you're a total Scrooge or completely obsessed with everything that's wrapped up with the most wonderful time of the year, annual Christmas parties are exempt from tax and National Insurance as long as the rules outlined below are followed:

  • The party can't cost more than £150 per person (including VAT)
  • The party must be an annual event, such as a Christmas or summer party
  • The party must be open to all of your employees
  • Shareholders aren't included in the exemption if they're not employees or directors

The icing on the cake? You can also claim an extra £150 per person for a plus one for each employee, as long as they're a family member or partner. So, helping your employees rock around the Christmas tree might be a bit less expensive than you first predicted.

Subscriptions

Signing up to specific memberships or subscriptions can also be claimed back as allowable business expenses when you're self-employed.

For example, if you've subscribed to trade or professional journals to keep up to date with the latest goings on and best practices in your business' industry, you can claim these costs back as allowable expenses. Similarly, if you've became a member of a trade body or professional organisation that's related to your business, you can claim these costs back too.

Legal, financial and insurance costs

Legal costs

If you invest in the professional services of accountants, solicitors, surveyors or architects to help with the running of your business, these legal fees can be claimed back as allowable business expenses.  

However, not all legal fees are tax deductible. You can't claim for the legal costs associated with the buying of property and machinery – you can only claim for these costs as capital allowances if you use traditional accounting.

Similarly, if you're fined for failing to adhere to legal rules and regulations, you won't be able to claim these back as allowable expenses.

Financial costs

Money matters when it comes to running your business. And thankfully, there are some allowable expenses you can claim on your financial costs to help make keeping on top of your budget a bit easier.

Bank, overdraft and credit card charges, interest on bank and business loans, hire purchase interest, leasing payments and alternative finance payments can all be claimed back as allowable expenses.

Be aware that if you're using cash basis accounting that you can only claim up to £500 in interest and bank charges.

You also can't claim for loan repayments, overdrafts or finance arrangements. And when it comes to customers not paying you, there are rules governing what debt you can and can't claim back as an allowable expense.

If you're using traditional accounting, you can claim for money you include in your turnover but will never receive (this is known as bad debts). You can only write off these debts if you're certain that they won't be recovered from customers later.

You can't, however, claim for:

  • Debts not included in your business' turnover
  • Debts linked to the disposal of fixed assets, including land, buildings and machinery
  • Bad debts that aren't properly calculated. For example, you can't just estimate that your debts are equal to 5% of your turnover

Insurance costs

Investing in professional indemnity insurance, public liability insurance or employers' liability insurance, is an easy way to protect your business if things take an unexpected turn for the worst.

Securing additional peace of mind is a worthwhile investment. However, you'll be glad to know that you can reduce the damage done to your wallet when purchasing these products as you can claim these back as tax allowable expenses.

Clothing, employee costs & training courses

Clothing

Do you wear a uniform or count protective clothing as one of the most integral tools of your trade? You can include the associated costs of this clothing as allowable expenses to claim back on. You can't, however, include the costs of the everyday clothing that you wear to work.

Staff costs

You've hired the best employees to help push your business forward and you reward their hard work and dedication with a competitive salary, pension contributions and maybe even benefits and yearly bonuses. But did you know that you can claim back these employee costs as tax deductible allowable expenses?

Here's the staff costs you can claim back as allowable expenses:

  • Employee salaries
  • Employee National Insurance contributions
  • Pensions
  • Bonuses
  • Benefits, including healthcare and dental
  • Agency fees
  • Subcontractors

However, when it comes to your own salary, National Insurance contributions, Income Tax, pension and life insurance, you're not able to claim these allowable business expenses.

Training courses

Looking to hone your skills to keep ahead of the pack? You'll be glad to learn that training costs are tax deductible expenses for the self-employed.

The only stipulation is that the training course you undertake must help you expand and improve upon the knowledge and skills related to the bettering of your business. This means that you can't claim back the costs of any training courses that will lead to the expansion of new areas of business.

Simplified expenses for the self-employed

Tax can be, well, taxing. We get it. So if you’re thinking this all sounds pretty complicated and you’re in need of a simpler solution, you could be in luck.

Simplified expenses are a way of calculating certain allowable business expenses using flat rates, rather than working out individual costs on a case by case basis. This is an optional way of claiming a return on your taxes, but could save your business time and effort. 

Simplified expenses can be used by sole traders and business partnerships that have no companies as partners. They can’t be used by limited companies or business partnerships involving a limited company.

You can only use these simplified flat rates for the business costs for vehicles, if you work from home, or if you’re also living in your business premises.

You can find the flat rates for vehicles, working from home, and living at your business premises by using the Government’s simplified expenses checker. You can also compare what you can claim using simplified expenses with what you can claim by working out the actual costs to help you work out if simplified expenses suits your business.

How to claim allowable expenses

The trick to keeping on top of all the allowable expenses leaving your business is to record everything. As such, spreadsheets are likely to become your best friends. To stay organised, set aside a specific time each week to make a note of the business expenses that you're liable to receive tax relief on so that you don't lose out on any money.

Keeping accurate records is vital as you could be fined by HMRC for submitting incorrect information. Add up all of your allowable expenses for the tax year and put the total amount on your Self Assessment Tax Return. You don’t need to include proof at this stage, but you need to keep the correct records and produce them if asked by the HMRC.

Another rule of thumb to abide by is to keep the receipts for every purchase you incur when running your business. HMRC dictates that receipts must be kept for six years after you've filed you tax return. They could decide to investigate your business' finances at any time within this period, so it's better to be safe than sorry.

Why not invest in accounting software to make filling out your financial spreadsheets a cinch? Take a read of AXA's guide to accounting software to help make tallying up your self-employed finances simpler.

Deadline for claiming allowable expenses

You have four years from the end of the tax year to make a claim. So for the 2019/2020 tax year, you'd need to submit your allowable expenses claim by 5 April 2023 by either submitting a P87 form online or posting it directly to HMRC.

Running a business is expensive. Thankfully, claiming back allowable expenses can alleviate some of the financial pressure that goes hand in hand with being self-employed.

By staying organised and keeping accurate records of your business' expenses, submitting your allowable expenses returns to HMRC should be a breeze. But if you're ever unsure what you're required to submit, the best thing to do is get in touch with HMRC directly for advice. That way you'll know you've done everything by the book and won't be blindsided by any surprise penalties.

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