Self-Employed Expenses: How to Reduce Your Tax Bill

How self-employed expenses work

By claiming expenses, you can reduce the overall amount of business tax you need to pay as a sole trader, freelancer, or other form of self-employed worker, such as a partner in a business partnership.

You do this by deducting your ‘allowable expenses’ from your turnover, in order to find your taxable profit.

For example, if your annual turnover was £50,000, and you had £7,000 in allowable expenses, you would only pay income tax and National Insurance contributions on your taxable profit of £43,000. This means your tax bill will be lower than if it was calculated using your full £50,000 turnover.

When calculating your self-employed expenses, you will need to consider your method of accounting, any capital allowances you are eligible for, and whether or not you want to use your tax-free trading allowance.

Cash basis vs traditional accounting

When you claim your expenses is informed by whether you use cash basis or traditional accounting:

Cash basis accounting: This is typically for smaller self-employed businesses with a turnover of no more than £150,000 a year. With cash basis accounting, you only declare income or expenses when they have been received or paid out, instead of on the date you were invoiced or billed. This means you only pay income tax on money you have received in your accountancy period.
Traditional accounting: if your annual turnover is £300,000 or more, you have to use traditional accounting for your tax return. Here, you must record your income and expenses as and when you are invoiced and billed. This means you may pay income tax on money you have not yet received.

» MORE: How to set up as a sole trader

What are capital allowances?

Capital allowances are another form of tax relief, applied to the cost of purchasing larger fixed assets, such as equipment, machinery and business vehicles. These are classed by HM Revenue & Customs (HMRC) as plant and machinery. There are various types of capital allowances, including:

the annual investment allowance (AIA), providing 100% first-year relief for plant and machinery investments up to £1 million.
the 50% first year allowance for new, special-rate (including long life) assets.
the 100% first year allowance on qualifying new main rate plant and machinery investments – otherwise known as ‘full expensing’.

Full expensing was previously only a temporary initiative. However, it has now been made permanent. In the 2024 Spring Budget, Chancellor Jeremy Hunt announced that this initiative will be further extended to also include leased assets ‘when fiscal conditions allow’.

If you are using cash basis accounting, you can claim for capital allowances for purchasing a business car, and allowable expenses for other equipment and machinery.

If you use traditional accounting, you can claim these equipment and machinery costs as capital allowances.

What is the tax-free trading allowance?

When self-employed, you can receive an automatic tax-free trading allowance of £1,000 on your gross trading income. Gross income is your total income before expenses and allowances have been deducted. So, for example, if your gross income is £7,000, after the trading allowance you would only pay income tax and National Insurance contributions on £6,000.

Importantly, you can only claim your trading allowance OR your allowable expenses and capital allowances. You can choose based on whichever is higher.

For example, if your annual allowable expenses totalled £700, you could choose to apply the £1,000 trading allowance instead. Similarly, if your expenses totalled £1,200, you could forgo your trading allowance to claim your allowable expenses.

What expenses can you claim when self-employed?

There is a long list of allowable expenses you can claim when self-employed, from staff salaries to stationery. However, you must not claim for any private purchases, even if you took money from your business to pay for them.

Similarly, if you use an item or service for both business and personal reasons, you can only claim expenses for the business use. For example, you would need to keep track of which calls you make for business, and which calls you make for personal reasons, to claim expenses on your mobile phone bill.

For certain situations that entail both personal and business use – such as using a vehicle, working from home, or living in your business premises – you can use simplified expenses rather than working out the actual costs. This means that these expenses will be calculated at a flat rate set by HMRC, saving you time having to work out the actual cost.

Below is a list of allowable expenses and capital allowances you can claim when self-employed.

Staff costs

Considering the cost of hiring someone in the UK, it is a relief that you can claim certain staff expenses as tax-deductible. These include:

employee salaries (including family members)
employee bonuses
workplace pension contributions
employer National Insurance contributions
employee benefits
agency fees and outside subcontractors
annual social functions available to all employees (costing less than £150 per person)

However, you cannot expense your own ‘drawings’ of cash or goods from your business. This includes the way you pay yourself when self-employed and running an unincorporated business.

Business premises

If you operate out of a dedicated business location – whether you own it or rent it – you can claim for certain allowable expenses, including:

business premises rents
business rates
business water bills
business energy bills
security for your business
business building insurance
maintenance of, and repairs to, your business premises

You cannot, however, claim expenses or capital allowances whenif you are buying your business premises.

If you live at your business premises, such as a bed and breakfast or care home, you can use simplified expenses to deduct a flat rate per person who lives with you. This may be easier than working out the exact split between personal and business use.

Office supplies and equipment

As well as the rent and bills at your business premises, you can claim expenses for the equipment and supplies that fill it. These include:

computers
computer software
printers, ink cartridges and other printing costs
stationery
postage
phone and broadband bills

If you use cash basis accounting, equipment and software are claimed as allowable expenses. If you use traditional accounting, they are claimed as capital allowances.

Travel expenses

There are a range of travel expenses that can be claimed when going on business trips, including:

air, train, bus and taxi fares
hotel rooms
vehicle insurance and breakdown cover
vehicle hire costs
fuel
parking charges

Be sure to make a clear distinction between business travel and personal travel, as you cannot claim for the latter. You also cannot claim for any fines you incur during business travel, nor can you claim for your commute to work.

Business vehicles

If you want to buy a business vehicle, regardless of the type, and use traditional accounting, you can deduct the cost as a capital allowance.

If you use cash basis accounting, you can claim a business car as a capital allowance, as long as you are not already using simplified expenses to calculate the costs of that same car. Any other business vehicle, such as a van or lorry, can be claimed as allowable expenses.

If you are using simplified expenses, you would use a flat rate based on mileage to calculate the cost of using your business vehicle. You cannot use simplified expenses for vehicles you have already claimed as an expense or capital allowance.

You may also be able to use simplified expenses to claim for fuel or electricity for business journeys outside your standard commute. You would calculate these expenses using the approved mileage rates.

Food and drink

There are certain instances where you can claim expenses for food and drink. Typically, your consumption would need to be outside your everyday working routine, such as a meal on an overnight business trip.

However, HMRC says that the cost of any meal you buy needs to be ‘reasonable’. You also cannot claim for meals out with clients, customers or suppliers.

Clothing

While you cannot expense your everyday clothing, even if you wear it to your place of work, it is possible to expense uniforms, protective clothing, and costumes for actors and entertainers.

Reselling goods

You can claim expenses for purchasing stock and raw materials related to your business, as well as any costs that can be directly attributed to the production of your goods or services. These can include postage, packaging and shipping costs.

Financial charges

You can claim for a variety of charges and fees related to using business bank accounts, loans and other credit facilities, including:

banking charges
overdraft and credit card changes
interest on business loans
interest on hire purchases
alternative finance payments

When using cash basis accounting, you can expense a maximum of £500 in interest and bank charges.

Accountants

Not only can hiring a business accountant help you keep on top of your taxes and expenses, you can claim back the cost of instructing an accountant in the first place.

Legal and financial costs

Alongside accountants, you can also claim back the costs of hiring lawyers, surveyors and architects.

On top of this, you can expense your professional indemnity insurance premiums, as well as any other business insurance policy.

Marketing and advertising

There are certain marketing costs that you are able to claim back, including:

newspaper and directory advertisements
bulk mail advertising
free samples
website costs

Subscriptions

You can keep up with your chosen industry through trade and professional journals, or join the relevant professional bodies, and claim the costs back as an allowable expense.

Training

In order to further your own business development, alongside that of your employees, you can expense training courses that help improve your work skills and knowledge.

However, there are a number of courses you cannot expense, including training related to starting a business, or expanding into a new area of business.

» MORE: How to grow your business

What expenses can you claim when working from home?

Just because you work from home, it doesn’t mean you can’t claim for a number of expenses typical of a traditional business premises. This includes heating, electricity, council tax, and your mortgage or rent payments.

In order to claim for these expenses, you will need to find a way to reasonably calculate what portion of those costs are incurred for business use, and what portion is for personal use. For example, you could roughly calculate how much electricity your home office uses out of your total household energy bill.

Alternatively, you could use simplified expenses to calculate your home-working expenses. This is a flat monthly rate based on how many hours you work from home. Currently, the rates are as follows:

Hours of business use per month	Flat rate per month
25 to 50 hours	£10
51 to 100 hours	£18
101 hours and more	£26

Simplified expenses for working from home includes all bills and costs, with the exception of telephone and internet expenses. To expense those bills, you would need to calculate the actual costs.

How to claim your allowable expenses and capital allowances

When you are self-employed, you can claim both your allowable expenses and capital allowances through your self-assessment tax return:

You will need to keep a record of all your expenses throughout the year.
When it is time to submit your self-assessment tax return, add up your total allowable expenses and capital allowances, and include this total on your return.
You don’t need to provide evidence of your expenses when submitting your return. However, make sure you keep a record of them, with proof such as receipts, in case you are asked to provide them by HMRC. If you’re self-employed, you must keep business records for at least five years.

You should ask yourself whether you need an accountant to help you keep on top of your taxes and expenses. Similarly, using a business bank account, rather than a personal current account, to run your organisation will make it easier to separate business expenses from private purchases.

» ROUNDUP: Best business bank account

Warning: This guide to self-employed expenses does not constitute tax advice. It does not cover every allowance that HMRC may or may not impose. If you’re unsure about any aspect of your Self Assessment, contact an accountant or check out Gov.uk for further guidance.

Image source: Getty Images

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