Key takeaways
- Allowable self employed expenses must be incurred wholly and exclusively for business purposes. Mixed-use costs such as phone bills or home office utilities can only be claimed for the business proportion.
- HMRC simplified expenses let sole traders claim flat rates for use of home (£10, £18 or £26 per month based on hours worked), business mileage (45p per mile for the first 10,000 miles, 25p thereafter) and living at business premises.
- The Annual Investment Allowance (AIA) gives 100% tax relief on qualifying plant and machinery purchases up to £1,000,000 per year, permanently set since April 2023.
- Sole traders with gross income under £1,000 can use the trading allowance instead of tracking individual expenses, receiving a flat £1,000 tax-free amount with no receipts required.
- All self employed records, including receipts, invoices and bank statements, must be retained for at least five years after the 31 January Self Assessment filing deadline for that tax year.
Introduction - What you can claim when Self Employed
Allowable business expenses are costs that you can claim as a deduction against your revenue, which reduces the amount of tax you need to pay.
Here's an example: if your revenue is £35,000 and your allowable expenses total at £5,000, you'll just be taxed on £30,000.
The rules surrounding allowable business expenses aren't always straightforward, and this is where our guide comes into play.
In this article we will run through the most common expenses that sole trader businesses claim for, along with tips you can implement to ensure that you are keeping proper records.
Bear in mind that this isn't a definitive guide, so if you need personalised advice, it's best to consult our accountants at Forma.
Claiming business expenses when Self Employed
The process of claiming allowable expenses is fairly simple. All you need to do is to sum up your expenses for the year, and input the total in your Self Assessment tax return.
You will need to have your paperwork in order:
- 1. Record your expenses as you incur them. This makes the administrative work less of a hassle than if you were to store away your receipts, and log in a lengthy list of expenses each month or quarter.
- 2. Keep a copy of all receipts and invoices. If necessary, you should also note down details relating to the expense you're claiming for. For example, you need to keep track of your mileage for travel expenses, or provide the necessary name and details if the expense is associated with a specific project or client.
- 3. Keep proper records. Should HMRC decide to conduct a check to obtain more information about your accounts, you will need to provide evidence of your purchases. These should match up with your other recorded business practices, for example your stock turnover ratio.
All self-employed records pertaining to a specific tax year must be kept for at least five years. For example, the records for your 2021/22 tax return (to be submitted by 31 January 2023) must be kept until 31 January 2028.
Tip: Most business owners find that it helps to minimise paperwork wherever possible. Take a picture of your receipts and store these images away digitally, using cloud storage platforms like Dropbox or an expenses app like Expensify.
Watch below HMRC video to discover allowable business expenses you can claim on your self-employed tax return to maximise your savings:
Office Expenses Allowed
Cost of business premises
You can claim expenses for:
- Office rental or coworking costs
- Business and water rates
- Utility bills
- Property insurance
- Security
For alterations to replace or install equipment, you can claim:
- Allowable expenses if you use cash basis accounting
- Capital allowances if you use traditional accounting
Use of home office
There are two methods you can use to work out your allowable home expenses: you can claim a flat rate allowance (also known as simplified expenses), or claim a proportion of your bills.
If you aren't sure which method is the better option for your business, you can use Gov.uk's simplified expenses checker tool.
1. Flat rate allowance
The flat rate allowance set by HMRC is:
- 25 - 50 hours of business use: £10 per month
- 51 - 100 hours of business use: £18 per month
- 100 or more hours of business use: £26 per month
The flat rate allowance applies to your light, heat and power usage. You'll need to work out the proportional costs for other expenses you want to claim.
2. Claiming a proportion of your bills
There are two ways to work out the proportional costs of your bills.
In the first method, you'll base your calculations on the number of rooms in your home and the amount of business use for each room. For the second method, you'll work out the costs based on the floor area of each room. The latter can be complex, so we recommend consulting an accountant.
Using this method, here are a few examples of costs you can claim a percentage of:
- mortgage interest
- rental costs (This applies if you're renting your home from a landlord)
- repairs and maintenance expenses
- household water expenses
Office equipment, furnishings and other fixed assets
High-value items, such as office furnishings and computers are considered capital assets.
While what is considered a capital asset will vary depending on your business or situation, an item is generally classified as a capital asset if it meets the following conditions:
- it's relatively valuable
- it provides long-term benefits to your business
- you need it to run your business
The costs of these items can't be claimed as an expense.
However, you can claim capital allowances on most assets purchased for business use, which will reduce the amount of income tax you pay.
Plant and machinery
Under the Annual Investment Allowance (AIA), you can claim tax relief on 100 percent relief of plant and machinery investments up to the threshold (currently £1 million, until 31 December 2021).
General office expenses
You can claim for basic office expenses, such as:
- postage
- stationery
- printing and ink cartridges
- computer software that your business uses for less than two years. You can also claim for computer software that you use for more than two years, if your company makes payments regularly to renew the license.
Marketing and advertising costs
Marketing and advertising expenses, such as the costs of creating a new website or providing free samples are tax deductible.
Subscriptions
You can claim for subscriptions to a trade or professional association—including trade or professional journals—as long as it is directly relevant to your work.
Travel & Communication Expenses Allowed
Business travel expenses
You can claim for the following travel-related expenses, as long as the travel is wholly and exclusively for business purposes:
- costs associated with running a car or vehicle, such as fuel expenses, parking fees and tolls.
- transport fares for flights, as well as rides taken via train, bus, taxi and ferries
- meals and accommodation for overnight business trips
Business mileage
As a sole trader, you can claim back mileage from HMRC if you use your personal vehicle for business trips.
According to HMRC, these trips are defined as journeys you make 'wholly and exclusively' for business purposes. Here are a few examples:
- trips taken to complete work (i.e deliveries)
- trips between two workplaces for the same job
- going from an employee's home to a client
- going to a temporary workplace
You can claim the following rates:
Note: At the moment, sole traders can't claim mileage for bicycling.
Mobile phone and broadband expenses
If you're using your mobile phone line for both business and personal use, you can't claim for line rental.
However, you're able to claim for call costs for business use if you obtain an itemised bill. If you have a separate mobile phone line for business use, you can claim the costs incurred. The same approach applies to calculating the allowable expenses for your broadband.
Financial & Legal Expenses Allowed
Professional fees
The costs incurred for engaging professional services—such as hiring an accountant, lawyer or architect—can be claimed as an allowable expense, as long as these services are carried out solely for business purposes.
For example, you can't claim for the time that your accountant spent working on personal matters, such as getting your Self Assessment sorted out.
Bank, credit card and other financial costs
You can claim for most financial costs, such as:
- bank, overdraft and credit card charges
- interest on bank and business loans
- hire purchase interest
- leasing payments
- alternative finance payments, for example Islamic finance
Business insurance policies
You can claim insurance policy costs, as long as you can prove that the policy is taken up solely for business purposes.
Common types of business insurance include professional indemnity insurance, public liability insurance, employer's liability insurance and business contents insurance.
Bad debts
You can claim for bad debts if you're using traditional accounting, and are sure that these debts will not be recovered from your customer.
You can't claim for the following:
- debts not included in turnover
- bad debts related to the disposal of fixed assets
- bad debts that are an estimation, and not accurately calculated
Do note that you can't claim bad debts if you use cash basis accounting.
Payroll & Staffing Expenses Allowed
Salaries and benefits
If you employ someone, you can claim the following staff expenses:
- salaries and bonuses
- pension contributions
- benefits
- employee childcare provision
- costs of training employees
- agency fees
- subcontractors
- employer's National Insurance
Pension contributions
Your pension contributions aren't a business expense, and therefore do not have an impact on your profits.
However, you can get personal tax relief from contributions you make into your pension scheme.
Work-related training
You can claim for training courses if the course content is directly related to your trading activity. Training courses that you attend to learn a new skill, which enables you to expand into new industries or offer different services aren't allowable.
Other Expenses Allowed when Self Employed
Donations
As a sole trader, there isn't a legal distinction between you (the owner) and the company.
Even if you decide to make a donation from your business bank account, this is regarded as a personal donation—and therefore can't be claimed as a business expense.
If you decide to make a donation via Gift Aid, the charity will receive tax relief for every £1 that you donate. If you're a higher rate tax payer, you can claim the difference between the rate you pay and the basic rate on your donation. For further details on how this is calculated, check out the Gov.uk website.
Eye tests and glasses
You can claim an eye test as an allowable expense, if it is required for the use of visual display equipment in your work.
In general, you can't claim for glasses or contact lenses unless these items are 'wholly and exclusively used for business purposes', and you're able to prove that you don't use them outside of your working houses.
One example would be that you have several pairs of glasses, one of which is used only when you're at work.
