I’ve updated this post on 13 August 2020
Self employed expenses reduce your tax bill. For that reason alone, they’re important and shouldn’t be ignored. That being said, they still represent one of the most overlooked and misunderstood ways that help business owners to pay less tax.
If you’re struggling to understand what you can and can’t expense, then read on.
In this guide to claiming self employed expenses, I’ll take you through the HMRC rules and share an allowable expenses list so you know what you can claim on your taxes. I’ve also enclosed my allowable and disallowable expenses pdf cheat sheet that you can keep hold of it so you can check what you can and can’t claim.
This advice in this guide is for self-employed business owners and sole traders. Different rules may apply if you have a Limited Company.
Why Are Your Business Expenses so Important
When you’re self employed, the amount of tax and national insurance you pay is based on your taxable business profits.
Profit means all your income less all your expenses. So by reducing your profit, you’re lowering the figure that you base your tax and national insurance calculation on.
Say, for example, you pay tax at 20% and bill your clients £20,000 you’ll pay tax of £4,000 (£20,000 x 20%).
If you have allowable expenses of £5,000 and claim for these against your taxes, you’ll pay £1,000 less tax. Your taxable profit becomes £15,000, so your tax would be £3,000 (£15,000 x 20%).
Allowable expenses are the best legitimate way you can pay less tax but it, unfortunately, gets forgotten because people don’t bother keeping their receipts or tracking their expenses with a separate business bank account.
There are more tips on tracking business expenses below.
What are the HMRC Rules Regarding Self Employment Expenses?
It will probably come as no great surprise that HMRC sets out strict rules about which expenses you can claim for (allowable expenses) and those you can’t (disallowable expenses).
But the overarching rule is that any expenses you claim on your taxes must be wholly and necessarily incurred for business purposes only.
Claim wrongly and you could face penalties. Miss out and you’ll pay more tax.
What are Allowable Expenses?
Allowable expenses are costs that you can claim for against your tax bill. Generally speaking, most of the things you pay for in your business will be an allowable expense. That’s because if it wasn’t for you working for yourself or being in business, you wouldn’t be paying for them.
Say you are a self employed social media manager and pay for Later.com to manage your clients’ social accounts, then the cost of this subscription will be an allowable expense.
Or if you are a self-employed web designer and travel to a client meeting then the cost of travel will be an allowable expense.
What are Disallowable Expenses?
There are certain self-employed expenses, that even though you may pay for as a result of working for yourself, you cannot claim against your taxes.
This includes things like:
- Personal expenses
- Certain types of clothing
- HMRC fines and penalties
- Travel from home to office
I’ve written more about disallowable expenses in a separate guide and include more specific details around these expenses, to help you get your tax claim right.
Self Employed Allowable Expenses List
Here’s a list of self-employed expenses that you should look out for and make sure you are claiming for:
Stock and Raw Materials
This will apply if you manufacture or produce your own products, for example, for Etsy. You can claim the cost of any goods you buy to sell on, that you use to make your own goods and any stock you are holding.
Wages, Sub-contractors and Freelancers
If you pay people to help you along the way, the cost can be claimed on your taxes as an expense, along with national insurance and pension contributions if you employ them.
Claiming business travel on your taxes can be a complex area. I’ve actually put together a separate guide to claiming business travel.
In a nutshell, you can generally claim travel away from your base of work for things like:
- Visiting clients for new or existing business;
- Seeing suppliers;
- Overnight stays (for business);
- Training courses;
- Parking charges are allowable but parking fines are not.
If you choose to use your personal car for business travel, then you can claim mileage at the HMRC set rates to cover the cost of using your car (this is known as simplified expenses).
The current HMRC’s set rates are 45p for the first 10,000 business miles and 25p per mile thereafter. The set rate covers the cost of fuel, servicing, tax, MOT and depreciation of a vehicle.
You can download and keep my excel business mileage tracker to help you keep a record of where you have been and how much you are entitled to claim.
If you buy a car through your business as a sole trader then, depending on how you bought the car, you can claim for a business portion.
This is a complex area and I’ve written a separate guide to buying a car through your business and claiming car expenses if you’re self-employed.
Many of us self-employed folks choose to work from home. If this applies to you, then you can claim for an amount against your taxes to reflect the use of space and increased household bills.
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.
Alternatively, you can claim an actual portion of your household bills.
For help calculating your claim, read my guide to claiming for your home office.
You can claim for the costs of branded uniforms that you have for your business. However, you cannot claim for non-branded uniforms unless they are for safety reasons.
Dual-use clothing, like business suits, are not an allowable expense.
There are certain circumstances when you are allowed to claim for food against your taxes.
Again this is a complex area and I have written a separate guide but you can generally claim for food when you are away from your office seeing clients but you cannot claim for client entertainment (such as lunch with a client).
The amount you can claim must be reasonable and you can find out more about the definition of reasonable in my guide.
If you choose to rent business premises, then you can claim:
- Rent/lease payments,
- Business and water rates,
- Property and contents insurance.
Websites are essential these days and you can claim the expense of getting your website and hosting it against your taxes, along with your email.
You may have to claim for your website using the annual investment allowance, depending on how you use it.
Marketing and Advertising
If you invest in marketing and advertising such as email campaigns, leaflets, flyers and business cards are all allowable business expenses.
Telephone and Internet
Your mobile phone and data is an allowable expense.
Your business insurance is a tax allowable expense. If you haven’t taken out business insurance, then you should consider it as it offers you protection.
Find out more about business insurance.
Trade or Professional Journals and Subscriptions
Whilst learning a new skill is not an allowable expense. The cost of maintaining a new skill with journals, subscriptions and training can be claimed against taxes.
Any legal fees or accountants fees you pay will be allowable against your taxes – providing they are all in relation to your business.
Payment Processing Fees
If you choose to take card payments in your small business then this tends to attract charges. These charges will be tax allowable.
Business Bank Account
You can claim any business bank account charges and interest against your taxes. Although if you choose to use the cash basis for your tax return then interest is capped at £500.
Claiming Expenses that You Use for Business and Personal Reasons
When you are your own boss, you have to do what it takes to get your business up and running.
That means that more often that you will have to pay for things that you use for both for business and personally.
That’s things like your:
- Mobile phone
- Glasses and contact lenses
In these cases, you can only claim a portion as an allowable expense.
So say you use your mobile phone for 60% work and 40% personal, then you can take 60% of the cost as an expense on your taxes.
Record Keeping for Self Employed Expenses
As part of your business admin, you are legally required to keep copies of receipts and invoices to back up anything you are claiming against your taxes.
It’s proof that you really bought something and that it was for business reasons.
Make sure you keep all your receipts. I’ve written a guide to organising your business receipts so you can make sure you don’t lose any of your receipts!
Claiming Allowable Expenses on Your Tax Return
You claim for your allowable business expenses as part of your self assessment tax return form, within the self-employment sections (boxes 17 -31).
If you complete the short-form tax return you only need to give HMRC the total amount of expenses you are claiming for.
But if you are filling out the full version, you’ll be presented with HMRC business expense categories. That means you’ll need to breakdown your expenses into different categories.
Is there a ‘Right Amount’ of Expenses an Individual Can Claim?
There is a misconception by some self employed individuals that they should be claiming a set amount of expenses on their tax returns.
There is no ‘right amount’ because no two small businesses are the same, even within the same industry.
One person made decide to use an accountant or another may have to buy more equipment to do their job.
There is no way to compare businesses which is why self-employment is so complicated!
The ‘right amount to claim’ are all the allowable expenses that you have paid for that are wholly and necessarily incurred for your work and that you have receipts or evidence to support.
HMRC will no doubt use some common sense checks when they review you tax return, reviewing:
- whether the type of expenses you are claiming suit the nature of your business;
- if it is in line with previous tax returns you have submitted;
- receipts upon request only.
If you are feeling confused by self-employed expenses then I can assure you that you are not alone!
Depending on your business, you’ll probably find that most of the things you pay for will fall into the category of allowable expenses. But there are some trickier costs that you may be able to claim for, even though you pay for them in the course of your business.
Download my self employed expenses cheat sheet and keep it, so you can refer to it each time you come up against something you aren’t sure whether you can expense or not.
There is more guidance on the HMRC .gov website to help you too.
I know there is a lot of confusion when it comes to what you can and can’t expense against your taxes – especially when friends tell you that they’ve been claiming for one thing and you haven’t been.
Here’s how to handle some common expenses.
Can I Claim Spotify as a Business Expense?
Many of us that work from home and listen to Spotify or watch Netflix while we are working.
But neither Spotify or Netflix can be claimed as a business expense.
That’s because they are not wholly and exclusively necessary for work purposes. You’ll be hard pushed to convince HMRC that you’ll need these for work reasons!
Can I Claim Gym Membership as a Business Expense?
Again the general rule is that expenses are tax allowable if they are wholly and exclusively necessary for the purposes of trade.
Where those expenses have a business and personal benefit (known as a duality of purposes), then it is unlikely that HMRC would accept that they are wholly business and so they would disallow them for tax purposes.
When it comes to gym membership if there is duality of purposes, then you would not be able to claim it as a business expense.
There are however some exceptions, such as actors or models where there is some argument that gym membership are essential for their trade and can claim tax relief.
Is Coffee a Business Expense?
If you’re anything like me, your morning coffee is essential to getting your day started!
Unfortunately that doesn’t make it an essential business expense.
If you buy a coffee onto the way into your office every day, then that is not a business expense.
If you are out and about, visiting clients or make a one-off visit to a supplier or other business reason, then those coffees would be an allowable business expense.
The rules around claiming food and drink are complicated and I have put together a separate guide to Claiming Food.
New Here? Learn how to set up the financial side of your business with these easy to understand guides and resources:
- Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
- Government Support For the Self-Employed During Coronavirus – Find out about the schemes available, which ones you are eligible for and how to claim;
- Tax Records and Bookkeeping – Understand what tax records you’ll need to keep and how to set up your own bookkeeping system;
- How to Fill In Your Tax Return Online – In this step-by-step guide, you’ll find everything you need to know to fill in your tax return online and beat the HMRC deadline.
- Self Employment Taxes Explained – Learn what taxes you’ll pay, how much and when;
- VAT Guides – From registration to de-registration, VAT schemes and thresholds, these guides will take you through the basics every UK small business owner needs to know;
- Invoice Template – Free template and step-by-step guide so you can get paid by your clients.