When you’re completing your Self Assessment tax return, you’ll need to work out your expenses, as you can subtract some of these from your turnover to work out your taxable profit.
It’s important to understand that you can’t go ahead and subtract all your self-employed expenses. HMRC has clear rules around what you can and can’t include, which is why the costs that you can include in your calculation are called ‘allowable expenses’.
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By defining allowable expenses, HMRC is trying to make sure that you only deduct expenses that are strictly related to your business.
Understanding which of your self-employed expenses are allowable and calculating your profit accurately is important for making sure you pay the right amount of tax.
Here’s an example:
Your business earns £25,000 in a tax year, but your allowable expenses add up to £5,000. You only need to pay tax on £20,000, which is your taxable profit.
When you’re completing your tax return, these are some of the costs that usually count as allowable business expenses.
You can include business stationery, printing costs (including printer ink), and postage. You can also include business equipment like computers and printers and computer software, but you may have to claim these as capital allowances if you don’t use cash basis accounting.
You can claim expenses for rent, maintenance and repair, utility bills, property insurance, and security. You can’t claim expenses for buying or building your business premises.
If you run your business from home, you can include part of your home utility bills, but you need to work out the proportion of your home that’s used for business, and what proportion of the month it’s being used for business purposes. If you work from home at least 25 hours a month, you can use ‘simplified expenses’, which is a flat monthly rate calculated by the government.
You can include business-related car or van costs, including vehicle insurance, fuel, hire charges, repairs, servicing and breakdown cover. This can be difficult to calculate, so you can use ‘simplified vehicle expenses’, which is a flat rate provided by the government.
You can also include business travel by train, bus, plane or taxi, and hotel rooms and meals during overnight business trips.
Bear in mind that travel for meetings, site visits etc. is included, but you can’t claim for the cost of travelling between home and work, so commuting or travelling to your business premises doesn’t count.
Also note that if you take a journey for both personal and business reasons, you must be able to separate out the business cost in order to include it.
You can’t claim for entertaining clients, suppliers and customers, or event hospitality.
You can include the cost of your stock, your raw materials, and the direct costs that arise from producing your goods.
If you need to hire a professional like an accountant, a solicitor, a surveyor or an architect for business reasons, you can include the cost in your calculation.
You can also include bank, overdraft and credit card charges, interest on bank and business loans, hire purchase interest and leasing payments. Note that if you’re using cash basis accounting, you can only claim up to £500 in interest and bank charges.
The cost of marketing including newspaper advertising, directory listings, mailshots, free samples and website costs can be claimed.
You can include the cost of uniform, necessary protective clothing, or costumes for actors or entertainers, but you can’t include the cost of everyday clothing that you wear to work.
Employee and staff salaries count as allowable expenses, as do bonuses, pension contributions, benefits, agency fees and employer National Insurance contributions.
You can include the cost of membership to trade bodies or professional membership organisations if they’re relevant to your business, and the cost of subscriptions to trade or professional journals.
When you complete your tax return, you may get the option to give a single figure for your allowable expenses or to give a detailed breakdown. If you choose to enter a single figure, you still need to work out all your expenses accurately, and keep a record of your workings in case HMRC queries your figures.
You should also keep receipts or other proof of purchase. You don’t need to include these with your tax return, but you may need to present them if you’re subject to a tax investigation.
Read more: how to fill in your tax return
The rules are different for limited company expenses. If you fall into this category, switch over to our guide to allowable expenses for a limited company.
HMRC host free, regular talking points meetings, designed to help tax agents get to grips with completing returns on behalf of their clients, as well as other issues. Have a look to see when their next how to show self-employed business expenses on your tax return session is.
Tax can be complicated, and you can face fines if you make a mistake on your tax return, so look at the guidelines on the government's website and seek professional advice if you need it.
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