Self-employed expenses: claiming expenses as a sole trader
The advice provided on this page is suitable for both sole traders and limited company directors.
Whether you are plumber, journalist, physiotherapist or pharmacist you will incur costs as a result of running your business. Some of these business costs could be claimed as business expenses. To help explain what expenses you could claim, HM Revenue and Customs have produced a rather hefty yet comprehensive 136 page guide (not quite the brief summary you are probably looking for).
If, like most small business owners you are a bit short of time, we have put together a quick review of the expenses that you can claim as either a sole trader or limited company and also summarised how expenses could affect your tax bill.
1. Expenses for sole traders and self-employed workers who do not run a Limited company
As you may or may not know, you will only be taxed on the profits of your company. Profits are simply your income less your expenses and any personal allowances.
So in a 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 £60,000.
Buying items through your business is less expensive than buying them personally, but remember you are still spending money, which could have been taken as cash. So make sure that you really need whatever it is you are purchasing through your company.
Claiming an expense through your company is very straightforward. Simply add up all your expenses receipts for the year and put the total amount on your annual self-assessment tax return. Be sure to remember that all expenses must be wholly and exclusively for the use of the company otherwise it is not a business expense. HMRC recommend keeping hold of your receipts for seven years after the cost was incurred, as evidence of all business purchases.
2. If you run a Limited company
For more information on limited company expenses please click here.
Reclaiming an expense as a limited company is a little different than if you were a sole trader, but the process is still pretty simple. All you need to do is transfer the funds from your limited company’s business bank account to your personal bank account. Just as if you were a sole trader make sure you keep all of your business expense receipts.
You will only be taxed on your profits, which is your total turnover less your expenses. For example, if you turned over £100,000 in a year and your total expenses amount was £60,000, you would only pay corporation tax of 20% on £40,000.
This is a very simple explanation of how limited company expenses work, so speak to an accountant if you have any questions.
What is an expense?
Whether you are a limited company or a non-limited company an expense is a business cost, that has been incurred solely and exclusively for your business. However, the process involved in claiming your expenses varies slightly.
There are other differences regarding expenses between limited and non-limited companies. The main expense that is at the forefront of most people’s minds is the cost of running a car. If you’re self-employed or a sole trader and the running of your car costs £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.
There are various 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 the mileage that has been used for business afterwards. For the first 10,000 miles in a year you can claim back 45p per mile and then 25p per mile thereafter.
Other expenses you could claim may include:
- Cost of goods bought for resale (stock)
- Equipment costs
- 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?
If a cost is not directly related to the running of your business then it cannot be claimed as an expense. Some examples of what cannot be claimed as an expense are:
- Parking fines
- Speeding tickets
- Client entertainment
- School fees
- Gym membership
- Hairdressing costs
- Training courses that are not related to your job
If you are confused about what you can and can't claim then feel free to 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 firstname.lastname@example.org.
You may also find the following pages helpful, if your thinking about making the move to self employment.