In today’s dynamic job market, being self-employed has become increasingly common. Whether you’re a freelancer, contractor, or sole trader, the flexibility and independence that come with self-employment are appealing. However, it also means you’re responsible for your income tax, making it crucial to maximise your allowable business expenses. In this comprehensive guide, we’ll delve into the world of self-employed expenses and help you navigate the tax landscape effectively.
Reducing Your Tax Liability: The Importance of Business Expenses
As a self-employed individual, your taxable income is calculated after considering your allowable business expenses. These expenses are essential costs directly related to your work, such as travel between clients, which can be deducted from your gross income, reducing your tax liability. In simple terms, these are referred to as ‘tax deductible’ expenses.
For instance, if you earn £60,000 in a year and have £5,000 in allowable expenses, your taxable income becomes £42,500 after deducting your personal allowance (£12,500 in the 2019/20 tax year). Without these deductions, your taxable income would be £47,500, potentially pushing you into a higher tax bracket. Thus, claiming all allowable expenses is crucial.
A Comprehensive List of Allowable Expenses
Here’s an extensive list of common allowable expenses that can be claimed against your income tax:
1. Office Supplies
- Printing costs/ink
- Phone and internet bills
- Software used for under two years (or on subscription)
2. Office Equipment
- Computer hardware
- Software used for over two years (capital allowances apply if using traditional accounting)
3. Business Premises
- Business rates
- Buildings insurance
- Security costs (purchased premises are not claimable)
- Costs related to business travel
- Calculate deductible costs for vehicles not ticketed or metered using simplified vehicle expenses
5. Legal and Professional Costs
- Fees for professionals like accountants, financial advisers, solicitors, surveyors, etc.
- Bank charges
6. Raw Materials/Stock
- Claim for raw materials or stock used in your work
- Most marketing costs are allowable expenses
8. Professional Insurance
- Special insurance requirements, including public liability, professional indemnity, and travel insurance
- Tax-deductible special clothing required for your job, such as uniforms or costumes
10. Trade Subscriptions
- Membership costs of trade bodies or professional organisations
- Subscription expenses for professional publications
The Tax-Free Trading Allowance
If you earn £1,000 or less annually from self-employment, you may qualify for the tax-free trading allowance. Under this scheme, you don’t need to register for self-assessment or notify HMRC unless requested. However, consider registering if you anticipate significant expenses or to access benefits like maternity allowance or making Class 2 National Insurance contributions.
Capital Allowances for Self-Employed Individuals
If you use the traditional accounting method, longer-lasting items like computers are considered capital assets rather than expenses. Fortunately, you can still claim capital allowances on these assets. However, most self-employed individuals prefer cash-basis accounting, particularly common among small businesses.
Claiming Expenses When Working from Home
If your workspace is located within your home, you can claim expenses such as heating, electricity, council tax, rent, internet, and phone usage. Ensure you only claim the proportion of these utilities used for your home office. Various methods exist to determine the correct proportion, including room count or simplified expenses. Consult your accountant to avoid over-claiming or under-claiming.
Understanding Self-Employed Expenses
Understanding self-employed expenses and the allowable deductions is essential for managing your tax liability effectively. By identifying and claiming these expenses correctly, you can reduce your taxable income and maximise your earnings. Stay informed about tax regulations and seek professional advice when needed to ensure you’re making the most of your self-employed status.
That was 10 of the most important self-assessment expenses you should be claiming. Contact DabHand Accounting for any self-assessment advice or if you have any questions about company formation. We’re always happy to help.