When you’re self-employed, you take on a lot of responsibilities. And when you’re busy looking after clients, providing a service, chasing invoices and keeping everything HMRC-compliant, you can’t help feeling that the day-to-day responsibility of that is like having a full-time job in itself. One of the best ways to remain financially astute is to grasp which expenses can be deducted to lower your tax bill.
By identifying the right business expenses to claim, you can reduce your tax-attributable profit, which could lead to potentially hundreds, or even thousands of pounds in savings per year. But what qualifies as an allowable expense? What’s not allowed? And how do you keep track of your records?
In this guide, we cover the most important things to know about self-employed business expenses in the UK.
What Are Self-Employed Business Expenses?
Self-employed business expenses are the essential costs of your business. HMRC makes it possible to subtract these from the income in order to calculate the taxable profit. The less your taxable profit, the less you’ll owe in Income Tax and National Insurance.
To be claimable, an expense must be solely for business use. In other words, if an expense serves both personal and business uses, you can at best claim the business purpose and, at worst, claim nothing if the personal use is substantial.
How Do They Work?
Here’s a rough example: Say you’ve earned £50,000 in a tax year. You’ve already spent £15,000 on things like equipment, travel and rent for an office. Instead of being taxed on the whole £50,000, you’re going to pay tax on £35,000.
Those taxable-income differences can generate significant savings, especially if you’re near the edge of moving into a higher bracket. Each allowable cost you can track and then claim legitimately can be used to reduce the tax you pay.
Why Is It Important to Claim Self-Employed Business Expenses?
Claiming your business expenses accurately isn’t just about ticking boxes, it has real financial and operational benefits:
- Lower your tax bill: By claiming eligible expenses, you’ll only be taxed on your profit, not your turnover.
- Maximise your take-home pay: Pay less in tax and take home more of what you earn!
- Track business health: Expense tracking is a way to find trends, overspending and opportunities for betterment.
- Avoid mistakes: Failure to claim what you’re allowed to – or claiming wrong expenses – can lead to HMRC investigations, or penalties.
- Plan ahead: Knowing your spending trends makes it easier to create a budget and plan for future growth or investment.
Ultimately, accurately reporting business expenses is an important aspect of being a financially responsible business owner.
What Are the Different Types of Allowable Self-Employed Business Expenses?
HMRC allows a diverse range of allowable expenses as long as they’re business-related. Here are the most significant categories to consider:
Office Costs
That would include things you already use every day, like stationery and postage, pens and printer ink. You can also deduct computer software subscriptions and hardware, as long as you use them for work.
Business Premises Costs
If you work out of a rented office, studio or co-working space, you can factor your rent, electricity, water and business rates into contributions. If you are working from your home, for instance, a portion of household bills for that workspace can be claimed.
Travel Expenses
Anything relating to business travel such as public transport, fuel, taxi fares, parking and tolls is claimable. Be warned: commuting to work at your usual place of employment does not count as an expense.
Vehicle Costs
You can claim either the actual running costs (such as fuel, insurance and maintenance) or HMRC’s simplified mileage rate. Be ready to substantiate your mileage and select one method per vehicle per tax year.
Staff Costs
That might cover such things as the salaries and bonuses of employees, pension contributions, and fees paid to freelancers or subcontractors. You can also claim employer National Insurance contributions and training for staff.
Stock and Raw Materials
If you’re selling physical goods, you can look at the costs you have incurred buying stock, raw materials, packaging and any goods bought for resale. This includes shipping costs and production materials.
Marketing and Advertising
This includes promotional costs like website development, SEO, printed brochures, email marketing platforms, online ads, and paid social media promotions. Branding, as well as logo design, may also be added.
Legal and Financial Costs
Professional fees, including accountants, solicitors, consultants, and business advisors, are allowable. You can also claim for bank charges on business accounts and interest on business loans.
Training and Development
Any relevant training to help you get better at your current business is deductible, like refresher courses or industry-specific certifications. Training for a new business or unrelated field isn’t permitted.
What Are Simplified Expenses?
Simplified expenses are a scheme that allows self-employed individuals to claim some costs using flat rates, instead of having to work out the business proportion of each expense. HMRC scrambled to do so to remove some admin and guesswork for people who work from home or use their personal vehicle for business.
Who Can Use Simplified Expenses?
Simplified expenses can be used by sole traders and business partnerships (where none of the partners is a company). They can be especially helpful if you are a small business owner with little overhead or working from home.
Simplified expenses are not available to limited companies.
How to Use Simplified Expenses
You can use HMRC’s flat rates for:
- Business mileage: 45 pence per mile (for cars and vans with a capacity up to 10,000 miles and 25p after 10,000 miles) and 24 pence per mile for motorcycles.
- Working from home: If you work 25-50 hours a month, you can claim £10 a month. Work 51–100 hours and get £18/month. Over 101 hours? Claim £26/month.
- Living at your business premises: If you operate your business at the property where you live (such as a B&B), you can claim a flat rate to cover household expenses.
You can mix and match using simplified expenses for travel, for example, and actual costs for other categories.
How to Claim Self-Employed Allowable Business Expenses
You include your business expenses when you fill in your Self Assessment tax return. Here’s how the process works:
- Keep a record of your income and spending across the tax year (6 April to 5 April).
- Enter your total business income as well as breakdown amounts for each of the expense categories when filling in your Self Assessment online.
- Utilise accounting software or spreadsheets to make sure your sum is correct.
- Send your return by 31 January after the end of the tax year.
You do not have to send specific receipts with your return, but HMRC could ask you for evidence at some point in the future, so it’s best to keep all your records sensibly filed away for at least five years.
Which Expenses Can’t a Sole Trader Claim?
Although HMRC is quite generous when it comes to allowable expenses, certain expenditure is definitely a no-go area. Here’s what you can’t claim:
- Personal spending: They range from everyday clothes to personal travel to meals outside of business travel.
- Client entertainment: A deductible business expense had been for meals, drinks or hospitality provided, regardless of whether they were business-related, meaning that with client entertainment, they are no longer tax-deductible.
- Fines and penalties: Penalties from HMRC, speeding fines, and other similar charges are not tax-deductible.
- Capital repayments: You can’t reclaim the money you paid on a loan, only the interest.
- Training for a new trade: If you’re learning an entirely new skill not directly related to your current business, this cost will not qualify.
Remember to use the “wholly and exclusively for business” rule. When in doubt, you should ask a professional to avoid mistakes or penalties.
Keeping a Record of Sole Trader Business Expenses
Good record-keeping is crucial not only for your own clarity on how much tax you owe, but in case HMRC ever does want to investigate your return. You will need to keep records for the period of five years after 31 January at the end of the relevant tax year.
Here’s what to keep:
- Receipts (digital and physical) for every expense
- Invoices sent and received
- Mileage logs if using your vehicle for business
- Bank and credit card statements
- Accounting software reports, if applicable
Think about signing up for a cloud accounting service like Xero, QuickBooks or FreeAgent. These tools also enable hassle-free receipt uploads, transaction matching and reporting that aids your tax return.
Speak to an Expert at Reed & Co to Learn More About Self-Employed Expenses
Working for yourself is fulfilling, but keeping track of your accounts and expenses can be overwhelming at times. If you’re not sure what you can and cannot claim, or if you just need someone to help you create a smarter system for documenting expenses, we’re here to help.
At Reed & Co we have experience working alongside sole traders and self-employed individuals from all sectors. We offer bespoke advice to help you remain compliant, allow you to be as tax-efficient as possible and offer you real financial clarity. Contact us today.
