Guide to Self-Employed Expenses
Whether you’re a plumber, journalist, physiotherapist or pharmacist you’ll incur costs as a result of
running your business. To help explain all of this, HM Revenue and Customs have produced a rather
hefty yet comprehensive 100 page guide (not quite the brief summary you’re probably looking for).
If, like most small business owners you're a bit strapped for time, we’ve put together a quick review
of the expenses that you can claim and also a summary of how expenses affect your tax bill.
Firstly how then do expenses work if you are a sole trader business versus a limited company, how
do you pay them and how do they affect your tax bill?
Well, you’ll be pleased to know that if you work as a sole trader / self-employed and not a limited
company, life is quite simple.
Basically your profits are your income less expenses, and you only get taxed on your profits, so the
higher your expenses, the lower your tax bill.
However, these must be expenses that are wholly applicable to the running of your business. It’s
worth bearing this in mind as you may be asked to provide evidence you actually incurred the
expenses and the expense was wholly necessary for your business if asked by HM Revenue and
Customs, so it’s no point making them up just so you can pay less tax.
As a sole trader, one of the most common expenses is your car, simply add up the miles you use for
business, the cost of running the car, any payments you have made buying the car, insurance and
compare it to the personal miles driven to come up with a business use percentage.
For example, if the total cost of running your car was £10,000 a year and 50% of the use of the car
was for business, you could claim £5,000 as an expense. Now there are rules for leasing, buying,
depreciating assets and different rules for vans but it’s probably best to have a chat with one of our
qualified accountants about that.
Paying expenses is simple, just make the expense, keep the receipt and at the end of the year, add
them all up and put this amount on your tax return. If you turned-over £50,000 and incurred
expenses of £20,000, you will be taxed on £30,000 less any personal allowances.
Because HMRC like to further complicate things, you could also, if your turnover is less than £67,000
a year, use the limited company method below to claim your miles.
If you run a limited company, things are very different.
For day to day expenses pay them yourself and claim them back through your company. To do this
you’ll just need to do either a BACs transfer from your business bank account or write yourself a
cheque from your company bank account cheque book.
Please be aware the next bit is very simplified and doesn’t include everything but it will hopefully
help you understand how expenses affect your tax bill. For a more detailed explanation it’s best
discussed with your accountant.
Basically expenses aren’t taxed, so if your turnover for example was £10,000 a month and you didn’t
have any expenses this month and you withdrew all the £10,000, you would pay tax on the full
£10,000. However, if you had £2,000 of expenses, you would now only pay tax on the £8,000 and
pay less tax. It doesn't work exactly like this as it doesn't include the effect of your PAYE salary,
dividends or even the flat rate VAT scheme (if you're on it) but hopefully it will give you a basic
understanding of how expenses affect your tax bill.
Running a car as a director of a limited company is also different; essentially you can claim 45p per
mile for the first 10,000 miles and 25p per mile thereafter. This makes life very simple but may not
be as valuable to you as if you were a sole trader, especially with the cost of fuel!
Remember, you must be able to provide evidence you actually incurred the expenses if HM Revenue
and Customs ever asked you, so make sure you keep accurate and up to date records of all of your
expenditure.
If you are running a business, anything you buy for your business is considered an allowable
expense. This includes things like:
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Cost of goods bought for resale (stock)
Cost of equipment you need to buy
Advertising
Delivery charges
Heating and lighting in your business premises
Rent of your business premises
Postage
Stationery
Relevant books and magazines
Telephone use
Travel
Bank charges on business accounts
What can't I claim?
You cannot claim for parking fines, speeding tickets and anything that isn’t directly related to
running your business.
If you want to claim expenses, you need to make sure you keep all your receipts. When you
complete your tax return at the end of the year, you declare all your income and all your expenses –
HMRC will do the rest.
If you're confused about what you can and can't claim - contact us and we will be more than pleased
to help you. Alternatively if you like a good long read then try HMRCs own document by clicking
here- Find out more about business expenses (PDF 128K) .