Your Guide to Self Employed Business Expenses

Every business has running costs. Sometimes, you can claim these as self employed business expenses. Knowing what to claim – and how much – is essential when it comes to getting your tax right.

Learn the different types of business expenses for self employed people, why they’re so important, and how you can manage your expenses effectively.

What are self employed business expenses?

Self employed business expenses are your running costs. Some of these costs will be classed as ‘allowable expenses’ by HMRC. These can be deducted from your tax bill, so you’ll be taxed on the remaining profit once these have been taken off.

You might be wondering, ‘what can I claim as self employed allowable expenses?’ Allowable business expenses for self employed people typically include things like office supplies and equipment, business travel and job-specific training.

For an electrician, that might look like purchasing a work van and fuel to travel to clients. For an Etsy seller, that could mean buying packaging that keeps your products safe on their journey to customers.

Getting your allowable expenses right matters. Say your annual turnover is £65,000, but you claim £10,000 in allowable expenses. You’ll be taxed on the remaining £55,000 instead of £65,000.

It’s also important not to overclaim business allowable expenses. If HMRC has reason to believe you’re hiding your true profit, you could face an investigation and a penalty.

Why is it important to claim self employed business expenses?

Claiming the right allowable expenses means you also pay the right amount of tax. Your self employment tax bill is calculated based on your taxable profit – not your total turnover. So claiming the right amount of allowable expenses can reduce your tax bill.

But it’s not just about tax. Business allowable expenses for self employed people can include things like professional development courses and training. So you can use your allowable expenses to forward your career and improve the skills that make your business thrive.

What are the different types of allowable self employed business expenses?

Allowable expenses for self employed people are divided into lots of different categories. These include:

• home office
• travel and transport
• office supplies and equipment
• professional services
• staff expenses
• marketing, advertising and branding
• training and professional development

It’s important to get your self employed business expenses right. Claiming for the wrong expenses could land you in hot water with HMRC, but then again, failing to claim your allowable expenses could mean you pay more tax than necessary.

HMRC provides a helpful self employed allowable expenses list, which we explain below.

Home office deductions

If you work from home at least some of the time, your allowable expenses can cover a portion of your domestic costs. The following items are considered business expenses self employed people can claim:

• heating
• electricity
• council tax
• mortgage interest or rent
• internet and phone use

Note – you can’t claim the entirety of these bills as self employed allowable expenses. You may be able to use simplified expenses if you work from home for at least 25 hours a month – but make sure you check the HMRC guidance. Otherwise, you’ll need to find a practical way to divide the costs. You could split them up by room, or by days spent working from home.

For example – if your electricity bill is £750 per year and you have six rooms in your house including a home office, you could divide the bill by six and claim £125 as a business expense.

If you work from home four days a week, you could claim £28.56 as an allowable expense:

£125 ÷ 7 = £17.86

£17.86 x 4 = £71.44

Travel and transport allowable expenses

Travel for business, fuel and parking all qualify as allowable business expenses.

According to HMRC, the following costs can be claimed back:

• vehicle insurance
• repairs and servicing
• fuel
• parking
• hire charges
• vehicle licence fees
• breakdown cover
• train, bus, air and taxi fares
• hotel rooms
• meals on overnight business trips

These costs are not considered allowable expenses – so you’ll have to foot the bill yourself:

• non-business driving and travel costs
• fines
• travel between home and work

If you’re buying a vehicle for business use, the rules are a little more complex:

• If you use traditional accounting, you can claim the purchase of a vehicle for business use as a capital expense.
• If you’re buying a car for your business and you use cash basis accounting, you can also claim this as a capital expense – but only if you’re not using simplified expenses.

Office supplies and equipment claims

Short-term and long-term business expenses

Equipment and supplies fall into two categories: allowable expenses and capital allowances.

You can claim allowable expenses for operating costs. These tend to be things that are used for less than two years – think office stationery, phone and internet bills, and software subscriptions.

A good way to answer ‘what are allowable expenses?’ in your business is to look at the things that are paid for multiple times over the course of a year.

Higher costs can also be claimed as business allowable expenses – things like business premises rent, utility bills, and property insurance and security.

You should claim capital allowances for things that are kept in your business over the long term, such as:

• equipment
• machinery
• business vehicles

These capital allowances are typically larger assets you expect to last for a long time. While there’s no exact time period defined for either category, you can find a comprehensive explanation of how capital allowances work on the HMRC website.

Special considerations for equipment and premises

Equipment that you keep in your business for a relatively long time – like computers or printers – can be claimed as allowable expenses if you use cash basis accounting, or as capital allowances if you use accrual accounting.

You can claim allowable business expenses for uniforms, protective clothing, and costumes that are necessary for your work, as well as goods for resale, raw materials, and direct costs from producing goods. But you can’t claim allowable expenses for depreciation of equipment or goods and materials for personal use.

You can’t claim expenses or allowances for buying business premises, but you can claim maintenance and repairs of premises and equipment. Check HMRC’s guidance on office equipment and supplies expenses to see if you need to claim it as a capital allowance or allowable expense.

Also, you can’t claim for non-business use of business premises, equipment or resources.

Professional services expenses

There could be times when you need to hire an accountant, solicitor, surveyor or architect – all of which come under allowable business expenses. You can claim for any business insurance policy, such as professional indemnity or public liability insurance, too.

Bank, overdraft and credit card charges can be claimed as self employed expenses. So too can interest on bank and business loans, hire purchase interest, leasing payments, and alternative financing options (such as Islamic Finance).

For costs associated with customers not paying you, read HMRC’s guidance on claiming for bad debts.

Staff-related allowable expenses

Staff salaries and costs associated with employees all fall within allowable expenses. This includes pensions, staff training and bonuses, as well as employers’ National Insurance.

You can also claim business expenses for subcontractor costs and agency fees, but not for carers or domestic help.

Marketing, advertising and branding expenses

Some costs associated with marketing your business can be claimed as allowable self employed expenses. These include newspaper adverts or directory listings, free samples, and website costs.

You can’t claim the costs of entertaining clients, suppliers or customers. The same applies to event hospitality, which isn’t an allowable expense either.

Training and professional development deductions

Training courses related to your business can be claimed as allowable expenses. These should help you improve the skills or knowledge you already use in your business.

For example, if you’re a freelance graphic designer you could claim the cost of a course on new design techniques. If you run a dog training business you could claim the cost of a workshop on training older pets. If you have a professional association membership, you can normally include the courses you need to take to meet your continual professional development (CPD) hours as allowable expenses too.

But if the courses are unrelated to your current business – say, you’re a virtual assistant who wants to expand into wedding photography – you can’t claim training for the latter. Courses that help you start a new business or develop a new revenue stream don’t count as self employed allowable expenses.

Miscellaneous claimable expenses

In addition to the expense categories we’ve already explored, there are a few more things you can add to your list.

Subscriptions to trade or professional journals, and trade body or professional organisation memberships can be claimed for. Just like learning and development courses, these need to relate to your existing business.

Self employed people cannot claim for charitable donations, but you might be able to claim self employed expenses for charity sponsorships if they meet HMRC criteria.

If you use accrual accounting, you can claim the legal costs of buying machinery as capital allowances.

If you’re using your £1,000 tax-free trading allowance, note that you can’t claim allowable expenses as part of this. The rules also differ for limited companies – check out HMRC’s guidance on company benefits and expenses for more information.

How to accurately calculate self employed allowable business expenses

Self employed allowable expenses can be calculated exactly, or by using simplified expenses for certain costs.

If you’re working out exact costs, you can do this in a few simple steps:

1. Track expenses throughout the year, by keeping physical or digital records
2. Calculate the total sum of your expenses
3. Report the expenses on the correct part of your self assessment tax return

Alternatively, skip the steps with cloud-based accounting software that captures expenses for you, and shows you reports of your total expenses compared with your overall income. Self employed people shouldn’t underestimate the importance of tracking business expenses – doing so can show you critical insights about your cash flow, profitability and tax liability.

With customisable expenditure reports, Xero can give you exact figures on your self employed allowable expenses. This helps with self employment tax planning and calculations because you can see precisely how much can be claimed as allowable expenses (and work out your taxable income accordingly).

Bear in mind that if you’re planning to use something for business and personal reasons, you can only claim allowable expenses for the business costs. For example, if your phone contract is £150 a year, and 50% of your calls and messages are for work, you can claim £75 as an allowable expense.

How to calculate simplified expenses for self employed people

Simplified expenses use flat rates instead of actual costs, and can be used by sole traders and business partners with no companies as partners. You can apply these rates to:

• business costs for some vehicles
• working from home
• living in your business premises

For business costs for applicable vehicles:

1. Keep a record of your business miles for the full year
2. Select the correct flat rate for vehicle mileage

The rate for the first 10,000 miles for cars and goods vehicles is 45p per mile

After 10,000 miles it’s 25p per mile for cars and goods vehicles

For motorcycles it’s 24p per mile

3.Multiply the number of miles you’ve done in the year by the relevant flat rate

E.g. for 12,000 miles in a company car it’s:

10,000 x 45p = £4,500

2,000 x 2

5p = £500

Total = £5,000

4.Include this amount in the total for expenses on your income tax return

For working from home costs:

1. Keep a record of the hours you spend working from home
2. Select the correct flat rate for working from home costs

For 25-50 hours of business use per month the flat rate is £10

For 51-100 hours of business use per month it’s £18

For 101 hours or more it’s £26

3.Multiply the relevant flat rate by the months worked

E.g. 6 months at £10 per month and 5 months at £18 per month

6 x £10 = £60

5 x £18 = £90

Total = £150

4.Include this amount in the total for expenses on your income tax return

For living in your business premises:

1. Keep a record of how many people live at your business premises
2. Select the correct flat rate for living in your business premises

If it’s just one person (you) the flat rate is £350 per month

If it’s two people the flat rate is £500 per month

If it’s three or more people the flat rate is £650 per month

3.Multiply the relevant flat rate by the number of months spent living there

E.g. for 12 months living and working from your home with two roomates, your total business premises expenses are £20,000

12 x £650 = £7,800

£20,000 - £7,800 = £12,200

Total claimable amount = £12,200

4.Include this amount in the total for expenses on your income tax return

For all other expenses, you’ll need to calculate the exact costs. You can learn more about using simplified expenses on the HMRC website.

How to claim self employed allowable business expenses

Self employed allowable expenses are claimed as part of your Self Assessment Tax Return.

Simply:

1. Keep records of all your self employed business expenses throughout the year
2. Add up all of the allowable expenses, and put the total figure in your self employment tax return

Or, you can skip the admin and instead use cloud-based accounting software, which automatically totals your allowable expenses. You just need to add the figure from your software’s expenses report to your Self Assessment Tax Return.

Will HMRC ask for proof of self employed allowable expenses?

You don’t need to send proof of business expenses when you submit your self employment tax returns. But you do need to keep proof and records of your expenses just in case HMRC asks to see them.

Keeping accurate records is essential for calculating your self employment tax. Adopting software that’s simple to use and HMRC-recognised can help you stay on top of these responsibilities.

How to keep track of your self employed allowable business expenses

Keeping a close eye on your expenses can help you better manage your cash flow, and ensure you’re paying the right Income Tax.

That’s why it’s vital to have a system in place for accurately capturing self employed business expenses – so you get the numbers right and avoid unpleasant surprises in your tax bill. Do away with manual expense tracking and use Xero accounting software for sole traders.

Xero makes it easy to see exactly how much you’re spending each month, and you can toggle the settings to show which expenses you can claim. Create forecasts and budgets based on real-time data, so you know where you stand today and in the future.

You don’t need to wait until tax season to know what your self employed business expenses are – you can get a live view of them at any time.

Digital record keeping is also an integral part of Making Tax Digital for Income Tax Self Assessment legislation, so getting cloud-based software now will ease the pressure in the long run.

Making expense claims correctly is essential for compliance with HMRC rules. Find an accountant or bookkeeper in our advisor directory, who can help you work out what to claim. For more support with small business money management, check out our cash flow content hub.