If you are self-employed – for example a freelancer, contractor or a sole trader –then you’ll pay income tax on your taxable earnings (unless you work through your own limited company or an ‘umbrella’ company). This means you will need to calculate and pay your own tax via self-assessment.
It’s important to ensure that you pay the right amount of income tax. To avoid paying more than is necessary, you should claim for your allowable business expenses. (Allowable expenses for limited companies may be slightly different.) In this guide we tell you how to reduce your tax if you're self-employed and a list of allowable expenses you can claim as deductible from the tax man.
How can I reduce my income tax by claiming business expenses?
As a sole trader or freelancer, all your income above the personal allowance is taxable. However, HMRC will often not tax you on money that you need to spend in order to keep your business running. For this reason, many of the costs directly related to the work you do (such as travel between clients) you can deduct from your gross income when calculating how much tax you need to pay. Such expenses are therefore known as ‘tax deductible’.
You make £60,000 income for the year, and you have £5,000 of allowable expenses. You also have a personal allowance (£12,500 in the 2019/20 tax year). Deduct both figures to find your taxable income, which is £42,500.
Note that without these expenses your taxable income would be £47,500 in this example, which would push you into the higher-rate tax bracket. This is another good reason to make sure you claim all allowable expenses.
Self-employed allowable expenses list
Here is a list of the most common allowable expenses that you can claim against your income tax:
1. Office supplies
You can claim for office supplies such as
- Printing costs / ink
- Phone and internet bills
- Software used for under two years (or on subscription)
2. Office equipment
If you use cash basis accounting, you can also claim expenses for certain business equipment such as
- Computer hardware
- Software used for over two years
However, if you use traditional accounting then you will need to claim capital allowances on these instead.
3. Business premises
Expenses you can claim on your business premises include:
- Business rates
- Buildings insurance
- Maintenance / repair
- Security costs
Note that if you buy your premises, you can’t claim any part of the cost of doing so as an expense.
Transport and travel costs that you can claim include any travel necessary for the purposes of your work (but not travel to and from your workplace). If a journey is for both personal and business reasons then ask your accountant to help you quantify the business cost.
If using a vehicle which is not ticketed or metered (e.g. a car you drive yourself) then you can calculate the deductible cost using simplified vehicle expenses.
5. Legal and professional costs
6. Raw materials / stock
You can claim for any raw materials or stock that you use in the course of your work.
Most of your marketing costs should count as allowable expenses.
8. Professional insurance
Some jobs require you to have special insurance e.g.
You can claim these as allowable expenses.
Any special clothing (e.g. a uniform or costume) that you need to do your job is tax-deductible.
10. Trade subscriptions
The cost of membership of trade bodies or professional organisations is an allowable expenses, as is the cost of subscribing to professional publications.
What is the tax-free trading allowance?
You may have read that you cannot claim business expenses if you also claim the tax-free trading allowance. This is an allowance for those who earn only low sums from self-employment, of £1,000 a year or less.
If you earn £1,000 or less per year from your self-employment, you don’t need to register for self-assessment at all or notify HMRC, unless asked to do so. However, if you expect to incur significant expenses then it may be worth your while to register anyway. Registering is also worthwhile if you don’t want to miss out on certain benefits (such as maternity allowance, or making Class 2 NI contributions).
Claiming capital allowances when self-employed
If you use the traditional accounting method, then longer-lasting items that you buy for business purposes (such as computers) will count as capital assets rather than expenses. You can however claim capital allowances on these assets. However, most self-employed people will use cash-basis accounting, which is generally preferred by small businesses.
What expenses can I claim if I work from home?
If your ‘office’ is located in your home (like a garden office), you can still claim expenses such as heating, electricity, council tax, rent, internet and phone usage. However, you can only claim for the proportion of these utilities that you use for your home office.
There are several different ways to work out the correct proportion. One method uses the number of rooms in your home; so for instance if your home has five rooms, one of which is your office, one-fifth of your heating bill may be tax-deductible. However, you should ask your accountant about the best way to work this out, to avoid over-claiming or under-claiming. Another option is to claim simplified expenses.
All other business expenses are claimable in the normal way.