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.
6 min read
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? What can you claim when you’re working from home? And just what is an allowable expense?
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.
It’s important to get this right.
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 small expenses, like stationery or business cards.
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. These “allowable expenses”– can be deducted from your taxable profit – which means you can reduce the overall amount of tax you pay. Other expenses can be claimed under capital allowances.
Allowable expenses, as a rule of thumb, are any costs needed to run your business. You can’t claim personal expenses. If an item that’s for personal use appears on the same receipt as a business cost, this part of the cost is known as a disallowable expense. You also can’t claim for 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.
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 (an allowable expense) and personal (a disallowable expense).
You can claim capital allowances if you purchase major assets 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 but can be claimed as business expenses. Also, claiming capital allowances on some items, such as a vehicle, means that you cannot make a claim for the same item under 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, if you’re working from home between 25-50 hours per month, you can claim a flat rate of £10 per month, rather than working out the proportion of your utility bills that qualify as business costs. This rises to £18 per month if you work from home between 51-100 hours per month and up to £26 if it’s any higher than that.
Likewise, 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.
Software like QuickBooks can automatically track and categorise your business mileage so you don’t need to work out the sums. Just swipe the app to sort personal from work-related trips.
It’s up to you whether you use simplified expenses or not, but if you want to, you must be working as a sole traders or in business partnerships in which no partner is a company, The government website offers a tool which helps you see if simplified expenses or calculating actual costs is the best option for you.
Trading and property allowances
These are the most simplified expenses of all. If you make more than £1000 renting out property or trading goods or services, you have the option of claiming £1,000 tax-free allowance instead of deducting your expenses. If you have money from both income streams, you can claim £1000 for each one.
The government requires you to 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.
There are no rules on how you must keep records. You can keep them on paper (receipts) or store them digitally in software like QuickBooks.
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 you’re asked to by HMRC.
QuickBooks makes it easy to record your income and expenses. Our mobile app extracts the data from a photo of your receipt and the mileage tracker makes it easy to sort personal trips from business travel. If you connect your bank accounts and credit cards to your QuickBooks, you’ll be able to see all your transactions in one place.
QuickBooks uses machine learning to spot patterns and save you time. So once you start categorising your expenses and transactions, QuickBooks will suggest new rules and automatically organise and reconcile them for you, ready for tax time.
If preparing you self employed business expenses for Self Assessment still feels a bit daunting, you could get expert advice from a QuickBooks certified accountant listed in our ProAdvisor Directory
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.