Self-employed business expenses: all you need to know

Get on top of your expenses with these top tips for small business owners, covering the basics, plus what you can and can’t claim.

5 min read

If you’re self-employed, your business will have various running costs. You can offset some of what you’ve spent against the tax you owe – that is if they’re allowable expenses and for the business only.

For a number of reasons, it’s incredibly important to get this right.

Self-employed expenses sound simple: just record what you earn and what you spend, right? Somehow, once you’ve entered the world of self-employment, it’s never that easy. Is this £8 lunch a personal or business expense? How do I record mileage? What the hell is an allowable expense?

Never fear; read on and we’ll try to make things a little clearer.

What is a business expense?

Any money used by or in support of your business is a business expense. These range from large expenses, such as rent or a company vehicle, to minute expenses, such as the cost of a coffee while you meet a client.

Being self-employed costs money. You’ll need to purchase the tools of your trade and cover any other running costs that your work demands. Some expenses – called “allowable expenses”– can be deducted for tax purposes. Other expenses can be claimed under capital allowances, which reduce how much you’re taxed on your earnings.

Allowable expenses

Allowable expenses, as a rule of thumb, are any costs whose sole purpose is to generate revenue for your business. As such, you cannot claim personal expenses. You also cannot claim any items covered by an insurance policy, or any costs related to the buying or improving of fixed assets (such as buildings) which last for several years.

Self-employed allowable expenses include:

  • Office and equipment, including phone bills and computer software.

  • Travel expenses, including vehicle insurance and fuel.

  • Clothing, such as work uniforms.

  • Staff costs, such as salaries and pensions.

  • Goods purchased for resale (i.e. stock).

  • Financial costs, such as the hiring of an accountant or business insurance.

  • Some costs associated with your business premises, such as heating and lighting.

  • Advertising/marketing costs, including the costs of running a website.

Sometimes, only a proportion of an expense is allowable: for example you may have a monthly train card that you use during work hours, but also outside work in the evening and weekends.

In these cases, you’ll need to split the expense between business (the proportion you can claim back) and personal (the proportion you can’t). The best way to do that is by estimating the proportion of the expense that is used for work.

If you’re unsure whether an expense is considered business or personal, download this HMRC PDF guide to help sole traders navigate their expenses, or contact the Self Assessment helpline for more guidance.

Capital allowances

You can claim capital allowances whenever you purchase major assets, aka “plant and machinery,” that your business will use over several years. You can usually deduct the full cost of these items from your profits before tax. Some items that can’t be claimed as an allowable expense can be claimed as capital allowances, including:

  • Plant and machinery (cars, computers, tools)

  • Fixtures (shelves, furniture, fittings)

Repair costs are not considered capital allowances. Instead, self-employed individuals should claim repairs as business expenses. Also note that claiming capital allowances on some items, such as a vehicle, means that you cannot claim the same item as a simplified expense.

Simplified expenses

Simplified expenses allow you to calculate some business costs with a flat rate instead of working out the actual costs. These include the costs associated with transportation, working from home, and living in your place of business.

For example, instead of calculating the actual costs of buying and maintaining the vehicle you use for business, you can instead claim a rate of 45p per mile for the first 10,000 miles, and 25p per mile thereafter.

Simplified expenses are only available to sole traders and business partnerships in which no partner is a company, but whether you use simplified expenses or not is up to you. The government website offers a tool which helps you see which method suits you best.

Claiming expenses

So, should you keep your receipts? Yes, yes, a thousand times yes.

The government requires that you keep all records of your business income and expenses for five years. This includes sales receipts, business expenses, VAT records (if applicable), PAYE records (if you employ people), and your personal income records.

When you have all your records compiled, you can fill in the total amount on your Self Assessment tax return. While you don’t generally need to submit proof of expenses in order to claim them, you do need to be able to produce your records if asked to by HMRC.

How you record your expenditures is up to you, but the old cliché of storing your receipts in a shoebox won’t last you very long. We recommend recording expenses immediately, retaining proof of all expenditures, and using accounting software such as QuickBooks Self-Employed.

QuickBooks allows you to easily record income and expenses. You can categorise your business costs to easily identify how you’re spending your money, making it simpler to separate allowable expenses from capital allowances come tax season.

Save time – how Lisa creates rules for repeat transactions

Lisa Pierce runs a jewellery business called Beanstalk Keepsakes. She uses QuickBooks Self-Employed to organise her receipts.

She tells us that there are certain expenses which she regularly incurs, like the monthly package of metals she picks up from her specialist suppliers. To help her process these repeat expenses without fuss she created a “rule” in QuickBooks Self-Employed.

This means that when she buys a certain type of material from a regular supplier, QuickBooks automatically puts the transaction into the right expense category.

“I don’t have to think about it anymore” Lisa told us when we visited. “I can devote more time to developing my business, safe in the knowledge my expenses are all being processed correctly”.

What’s more, QuickBooks keeps learning on the basis of what you’re doing. Once you start adding expenses, QuickBooks Self-Employed will help you out by suggesting new rules for recurring expenses.

Found this article about self-employed business expenses useful? Using software like QuickBooks is a great way to make sure you stay on top of your expenses – and save time.

Discover QuickBooks Self Employed today