Self employed expenses - claiming expenses as a sole trader
and a bit of advice if you're running a Limited company.
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 as either a sole trader or Limited company and also a summary of how expenses affect your tax bill.
1. Expenses for sole traders and the self employed who do not run a Limited company
As you may or may not know, you will only get taxed on the profits of your company. Profits simply are your income less your expenses and any personal allowances.
So in nutshell, if in a year you turned over £100,000 and had expenses of £60,000 you would only pay tax on £40,000 less any personal allowances.
However, it is still worth remembering that even though you are paying less tax, you will have still spent £50,000 and taken it from your business. Yes, buying things through your business is less expensive than buying them personally via post tax income, however you are still spending money some of which you could have taken as cash, so make sure you really do need whatever it is you’re buying.
Taking an expense for your company is very simple, you just need to add all your receipts up for the year and put it on your tax return. You need to remember the expense has to be wholly and exclusively for the use of the company otherwise it is not a business expense. HRMC recommend keeping hold of your receipts for six years, as evidence of all business purchases.
2. If you run a Limited company
Reclaiming an expense when limited is a little different but still pretty simple all you need to do is transfer the funds from your limited companies business bank account and transfer it to your personal bank account. Just as with a sole trader make sure you keep all of your business receipts.
In a very simple explanation expenses via a limited company work like this (please remember this is very simplified and you should speak to an accountant if you have any questions).
If for example you turned over £100,000 in a year and had £60,000 of expenses, you would only pay corporation tax of 20% on the £40,000 instead of£100,000. This is because your profit is turnover less expenses.
This is a very basic example, it doesn’t take into account any personal tax you may still be left to pay, but hopefully it still gives you a flavour of how it works.
An expense for both Limited and non-Limited companies are the same thing as they are a business cost, although as you now know how you claim the expense can vary slightly.
There are other slight differences, the main one most people think about is running a car:. If you’re self employed or a sole traders and the running of the car £10,000 for the year and you use your car for business purposes 50% of the time you could claim back £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 accountants about this.
If you run a Limited company it will probably make more financial sense to reclaim the miles rather than buy the car through the company. You will need to keep track of your mileage and claim back mileage. For the first 10,000 miles in a year you can claim back 45p per mile and then a further 25p per mile afterwards.
Other expenses you could claim are:
- Cost of goods bought for resale (stock)
- Cost of equipment you need buy
- Delivery charges
- Heating and lighting in your business premises
- Rent of your business premises
- Relevant books and magazines
- Bank charges
- Telephone use
- Bank charges on business accounts
What can't I claim?
Parking fines, speeding tickets and anything that isn’t related to running your business.
If you're confused about what you can and can't claim - contact us and we will be more than pleased to help you, click the link and Ask us Question, call us on 0500 234111 / 01442 275767 or email@example.com.
You may also find the following pages helpful, if your thinking about making the move to self employment.
- Self employed take home pay calculator
- Self employed FAQs
- Tax Return help
- Setting up as a freelancer