Self-employed expenses (allowable business expenses) reduce your tax bill, alongside other income tax allowances and reliefs set out by HMRC. 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 so you can understand exactly what you can and can’t claim against your taxes. I’ve also enclosed my allowable and disallowable expenses cheat sheet that you can keep hold of ready for when you fill in your tax return.
This advice in this guide is for self-employed business owners and sole traders who file self-assessment. Different rules may apply if you have a Limited Company.
Updated 20 August 2021
Table of contents
- 1. What Expenses Can You Claim as Self-Employed?
- 2. What are Allowable Business Expenses?
- 3. What are Disallowable Expenses?
- 4. Self Employed Allowable Expenses List
- 4.1 Wages, Sub-contractors and Freelancers
- 4.2 Business Travel
- 4.3 Business Mileage
- 4.4 Car
- 4.5 Home Office
- 4.6 Clothing
- 4.7 Food
- 4.8 Office Rent
- 4.9 Website
- 4.10 Marketing and Advertising
- 4.11 Telephone and Internet
- 4.12 Insurance
- 4.13 Trade or Professional Journals and Subscriptions
- 4.14 Professional Fees
- 4.15 Payment Processing Fees
- 4.16 Business Bank Account
- 5. Claiming Expenses that You Use for Business and Personal Reasons
- 6. Keeping Records of Allowable Expenses
- 7. How to Claim Allowable Expenses
- 8. Is there a ‘Right Amount’ of Expenses an Individual Can Claim?
- 9. FAQs
- 11. How to Claim Your Allowable Business Expenses
- 12. How to Calculate Your Total Allowable Business Expenses
- 13. Key Takeaways
1. What Expenses Can You Claim as Self-Employed?
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 income 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 track their expenses carefully with a solid accounting system.
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.
2. What are Allowable Business 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 do your bookkeeping on Xero, then the monthly subscription once the 30 day free trial ends, will be an allowable expense.
3. 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.
4. 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
- Wages, Sub-contractors and Freelancers
- Business Travel
- Business Mileage
- Home Office
- Office Rent
- Marketing and Advertising
- Telephone and Internet
- Trade or Professional Journals and Subscriptions
- Professional Fees
- Payment Processing Fees
- Bank charges for a business bank account
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.
4.1 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.
4.2 Business Travel
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.
4.3 Business Mileage
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.
4.5 Home Office
Many of us self-employed folks choose to work from home. If this applies to you, then you can claim 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 the costs of branded uniforms that you have for your business. However, you cannot claim non-branded uniforms unless they are for safety reasons.
Dual-use clothing, like business suits, is not an allowable expense.
There are certain circumstances when you are allowed to claim food against your taxes. Again this is a complex area and I have written a separate guide but you can generally claim for food and drink when you are away from your base of work seeing clients but you cannot claim for client entertainment (such as lunch with a client).
4.8 Office Rent
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.
4.10 Marketing and Advertising
If you invest in marketing and advertising such as email campaigns, leaflets, flyers and business cards are all allowable business expenses.
4.11 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.
4.13 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.
4.14 Professional Fees
Any legal fees or accountants fees you pay will be allowable against your taxes – providing they are all in relation to your business.
4.15 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.
4.16 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.
5. 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:
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 when you fill in your tax return.
6. Keeping Records of Allowable 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 as part of your business records.
7. How to Claim Allowable Expenses
You claim for your allowable business expenses when you fill out the self-employment section of your tax return using boxes 17 – 31. You’ll be required to enter a breakdown of your expenses by category so it will help to produce an income and expenditure statement so you have these numbers ready.
If you fill in the short tax return, you’ll only need to enter one figure which is the total of all allowable expenses you are claiming for.
8. 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 it can be hard to understand self-employment.
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 your tax return, checking:
- 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.
9.1 Can I Claim Spotify as a Business Expense?
Many of us work from home and listen to Spotify or watch Netflix while we are working. But neither Spotify nor 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!
9.2 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 trade purposes. Those expenses have a business and personal benefit (known as a duality of purpose), then it is unlikely that HMRC would accept that they are wholly business. So they would disallow them for tax purposes.
When it comes to a gym membership if there is a duality of purposes, 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 is essential for their trade and they can claim tax relief.
9.3 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. But 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.
11. How to Claim Your Allowable Business Expenses
You claim for your allowable business expenses in the self-employment section of your self-assessment tax return. When you use the short form self-employment section because your turnover is less than £85,000 you can choose to enter your expenses as one lump sum or give a detailed breakdown. Whichever you choose to do, you’ll need to add up all your expenses, including simplified expenses to make things easier (if appropriate to you) and keep all your receipts for 6 years.
12. How to Calculate Your Total Allowable Business Expenses
Adding up all your business expenses can be overwhelming, especially trying to figure out where to start. Self-employed business owners commonly need to look at:
- Bank statements;
- Credit card statements;
- ‘Out of pocket’ expenses (the bits and bobs you paid for from your own money in cash or via a personal bank account);
- Online statements such as Etsy or Amazon.
13. Key Takeaways
- Allowable expenses are the costs you pay for in your business that you can claim against your taxes;
- Not all expenses as allowable – these are known as disallowable expenses;
- You cannot claim for personal expenses;
- You must keep all receipts and invoices to support any expenses you are claiming as a tax deduction;
- There is no right or wrong amount of expenses to claim, it comes down to whether they are wholly and necessarily incurred for business reasons.
When it comes to claiming expenses, always use your judgement when it comes to deciding what you deduct against your taxes. Incorrect claims can result in penalties. And, as always, if you aren’t sure, seeks the advice of a professional.