Business Expenses

Self-employed, freelancers, small businesses claimable household expense

Are you a Self-employed working from home?

If you are a self-employed working mostly from home or running your business from home, a percentage of you household expenses (e.g.  Rent or mortgage, Lighting & heating, Council tax, water rates, interest, certain repairs etc.) can be classified as business expenses, therefore claimable. 

There are different ways to apportion such home running cost depending on how you run your business. Take for example you have a 4 bedroom house (excluding kitchen and bathroom), and you use one of the rooms for your business activities, you may be able to claim one quarter of your qualifying household expenses against your business income.  See HMRC Business income manual for more examples on how to calculate this.

How easy is it for me to calculate the element of my household income that is eligible as business expenses?

If you do not like to use the method above or you think it is a bit too complex for you, HMRC has a simplified flat rate method which allows you to claim household expenses based on the number of hours that you work from home.  In order for you to use this method you should be working a minimum of 25 hours per month from home.

With flat rates allowance, you are not oblige to keep any receipts, they are relatively easy to calculate, but it might result in a relatively lesser claim than if you were to use a proportion of your household cost as indicated above, please check that flat rate is right for you before you embark on it as a claim method.

Below is a simplified HMRC flat rate hours and amounts you can claim;

No. of hours per monthFlat rate Amount
25 -50£10
51 –  100£18
101 +£26

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What Business Expenses can I claim against my tax as a self-employed?

Your business will have various running costs, but not all business expenses that you incur in the running of your business can be deducted against your income for tax purposes. You can deduct some of these costs to work out your taxable profit as long as they’re allowable expenses.  ‘Allowable’ expenses are those which you can deduct against your trading income to calculate the profits on which you will pay tax bill.

Which business expenses are allowable?

HMRC has clear rules around what is allowable expense and what isn’t. The definition according to HMRC tries to make sure that you only deduct expenses that are strictly business related. For a business expense to be allowable, it must have been incurred ‘wholly and exclusively’ for the purposes of the business.  It is important to understand which of your self-employed expenses are allowable in order to calculate your profit accurately and pay the right amount of tax.

If you pay for something that is partly business and partly private e.g. telephone bills, then you’ll need to apportion the cost between business and private use. Only the business part is allowable and therefore can be claimed against your trading income.

If you run your own limited company, you need to follow different rules. You can deduct any business costs from your profits before tax. You must report any item you make personal use of as a company benefit.

Below are some Costs on HMRC website that you can claim as allowable expenses:

What are disallowable business expenses?

These are expenses that are not allowable for tax purposes.  Any expense that is incurred wholly for a private purpose is a disallowable expense and cannot be deducted against your trading income when calculating your taxable profits.

Some business expenses that you incur may be allowable, but are a capital rather than revenue for tax purposes.  Capital expenses cannot be deducted against your trading income, but may qualify for Capital Allowances instead.

What is the difference between a capital and revenue expense for tax purposes?

A capital expense is usually a larger item of expenditure on something that you would expect to last for a reasonable amount of time, maybe for more than a year.

A revenue expense is something that will normally last for a shorter period of time and is usually used up in your day to day business activities.  For example, paper or ink for your printer.  Most of your regular business expenses are likely to the revenue expenses and are allowable for tax purposes. However, you can also include business equipment like machinery, computers and printers, business vehicles, for example cars, vans, computer software if you use cash basis accounting, otherwise, you may have to claim as capital allowances when using traditional basis accounting.

Note: You can get up to £1000 tax free trading allowance, but cannot claim expenses if you’ve used up your £1,000 tax-free ‘trading allowance’

How will I know which expenses are allowable or disallowable?

There is a helpful guide (HS222) on HMRC website called How to calculate your taxable profits.  This help sheet covers some of the more common allowable and disallowable expenses.

Sounds complicated, right? That’s why we are here, to help you complete your tax return more efficiently.

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Taxable Profits and allowable expenses

The profits shown by your accounts may not be the same as that on which you pay Income Tax. This is because some expenditure is not allowable in working out the taxable profits of a business. These include:

  • Business entertainment;
  • Amounts spent on items of a capital nature;
  • Professional costs related to capital expenditure; and
  • Own wages or drawings.

Self Employed Tax Tips

  • A convenient choice to draw up your business accounts is 31st March as it coincides with the end of the Tax Year on 5th
  • Sometimes, it may be better to use a date early on in the tax year, e.g.  30th April, as this gives you more time to plan for the payment of the tax due on your profit.
  • If you run a seasonal business, it may be better to pick an accounting date to coincide with the less busy time of the year and when stocks are low.  
  • If you work from home and a specific area of your home is set aside as an office you can claim a deduction for the appropriate proportion of fixed costs such as mortgage interest, council tax, utility, cleaning etc.
  • In cases where the costs of your business, such as a car, are used both for personal use and work you should charge a fair and reasonable percentage of the expenditure to the business.
  • If you are married or live with a partner who helps in the business you can claim the salary paid to him/her as a business expense. You should pay a sensible amount for these services. If this is their only job or income there will be no tax or National Insurance to pay on an annual wage less than £8,632.  
  • It may be tax efficient to purchase items of a capital nature toward the end of an accounting year rather than at the start of the following year. You will then benefit from the 100% first year allowance at an earlier date.
  • There is a special form of tax relief for trading losses in the early years of a new business.
  • Losses incurred during the first four tax years can be set against your total income for the three years prior to that in which the loss arises. Relief is first of all given against total income for the earliest year.
  •  Any of the expenditure for your business which you incurred in the seven years before you started to trade is:
  • Treated as if it was spent on the first day of business; and
  • Tax deductible.

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