Tax allowable expenses: a guide for the self-employed
There are many business expenses that you, as a self-employed person, can deduct from your tax bill. Such expenses are known as allowable expenses. They include costs you incur solely for the purposes of your work, i.e.: office expenses such as business stationery, printing, and postage costs (office equipment such as laptops and printers can be claimed via capital allowances), financial and legal costs, business insurance, accountancy fees, marketing and advertisement expenses. Most of the above-mentioned costs can be claimed as allowable expenses (there are a few exceptions), but certain items are not as straightforward as others. Rent and travel expenses can be tricky, so require special consideration.
If you rent your business premises – whether it is an office space, a co-working site or even an occasional meeting room – this expense falls under the category of business expenses which you are allowed to deduct from your tax bill. If, however, you run your business from the comfort of your home and cannot provide rental receipts as evidence of incurred costs, special calculations will have to be made. The first step is to calculate the total economic cost composed of the following:
- Rent charge or mortgage interest
- Council Tax
- Electricity, water, and heating
- Internet and telephone bills
This figure will serve as a basis for figuring out the amount that you can actually relate directly to your business. The amount of time you spend working from home or the number of rooms used as office space are the factors based on which you can arrive at the figure which you can refer to as your rental expenses.
Say, you have three rooms in your house and you only use one of them for your business purposes. If in one year you paid £1,000 Council Tax and £500 for electricity, the amount that you can claim as a rental expense is £500 (£1,500 divided by the number of rooms, i.e. three). Further, if you only work from home two or three days a week, the amount will have to be halved, coming down to £250 of an allowable business expense.
For those who work from home for 25 hours or more and would like to avoid complex calculations, HMRC offers a simplified expenses scheme. The simplified expenses flat rates are:
- £10 per month for those working from home for 50 hours or less monthly
- £18 per month if your monthly business hours are between 51 – 100
- £26 per month for over 101 business hours.
Similar to property costs, you can calculate a business proportion of the overall vehicle running costs to be deducted from your tax bill (note that tolls, congestion charges, and parking fees can also be claimed as business travel costs, while trips between home and work are excluded from the allowable expenses category). Again, the simplified expenses scheme offers a more straightforward solution by enabling you to make flat rate deductions – 45p per mile for the first 10,000 miles per annum and 25p per mile after 10,000 miles. You need to keep accurate records of all your business trips and their details: dates, destinations, the purpose of journey, and miles traveled. Excel spreadsheets used to be the most popular method for maintaining such records; now you have a growing choice of mileage tracking apps to do the job for you.