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What expenses can a self-employed sole trader claim?

October 14, 2021

As a self-employed sole trader, regardless of the work you do, you're going to incur some costs. Whether it's from purchasing office supplies or needing to travel across the country to complete client work, these running costs can very quickly add up.

The good news is that these business expenses can, if managed correctly, reduce the total amount of Income Tax you need to pay when it comes to paying your Self Assessment tax return on the 31st January.

HM Revenue and Customs (HMRC) allows self-employed sole traders to deduct certain business expenses from their overall income to claim tax relief on the Income Tax, subsequently reducing the amount of tax they owe. However, knowing what counts as an allowable expense and what doesn't is critical to making sure you submit the right information to HMRC, both for holding on to more of your money and keeping you out of legal trouble.

In this article, we'll be covering what allowable expenses are, what classifies as an allowable expense for sole traders, and how to keep track of your allowable expenses over the tax year.

What exactly are allowable expenses?

Allowable expenses are the business costs that you can subtract from your total profit to figure out what your taxable profit — the amount that you will need to pay Income Tax on — is.

Taxable profit = Total profit - Allowable business expenses

The more business expenses you rack up, the less you pay on Income Tax, which is why it's good to get into the habit of hanging onto your receipts whenever you make a business purchase. These recorded expenses are added to your Self Assessment tax return at the end of the year, and legally must be kept for six years.

However, not all business expenses are made equal. Even if you purchase an item intended for business use, it may not qualify as an allowable expense and subsequently won't be deducted from your taxable profit.

Before you sit down to work out your allowable expenses, it's important to distinguish between business expenses and personal expenses. It's not unheard of for self-employed people to muddle the two when working out their Self Assessments, which can lead to problems further down the line.

Business expenses vs. personal expenses

In short, personal expenses are costs not directly related to your business, whereas business expenses are payments made for items that will be used exclusively to conduct business and not for personal use.

For a business expense to be classified as such, the "exclusively" bit is important. Items such as office supplies and certain computer software purchased with business intentions and used for business purposes get a big tick from HMRC when it comes to labelling them as an allowable business expense.

However, as with anything else in the accounting realm, the lines between business expenses and personal expenses are often blurred. For instance, you might have a mobile phone that you use to make personal calls, or a company car that you occasionally use to visit friends.

Even when these expenses carry a dual purpose, when calculating your allowable expenses you need to figure out the ration between personal use and business use to improve the accuracy of your claim. For example:

You spend £100 on your phone bill this month, but 25% of the calls you made were personal phone calls. This means that you can only claim £75 as a business expense.

When dealing with these dual purpose expenses, it's a good idea to make sure that when you're recording the expense you can justify that the purchase is predominantly business-related. For instance, you're more likely to have a successful claim if your mobile phone is in the business's name instead of your own.

Keeping track of your expenses

Knowing that you need to track your expenses is one thing, but knowing exactly how to do it efficiently is another.

As a sole trader, the best place to start is with Ember. We offer a free package for sole traders starting out, with receipt capture technology making it possible to log your purchases with ease.

Charts in Ember app

It's good to get into the habit of logging your purchases as soon as you've made them, otherwise the receipts will start to pile up on your desk, making it a far more difficult task than it needs to be.

Allowable expenses you can claim as a sole trader

When completing your Self Assessment tax return, the following costs, if applicable to the rules outlined above, can classify as allowable expenses.

When considering whether your business expenses classify as an allowable business expense, keep in mind that HMRC is likely to base whether they approve or reject the claim on concepts such as 'reasonableness' and 'fairness.' For instance, if you need to travel across the country to carry out work for a client, HMRC will likely approve a standard return train fare, but may question the need to travel First Class.

Accounting costs

As an accounting app run by accountants, it only makes sense for us to start with how you can claim tax relief on the services keeping your finances in shape. You can get a tax deduction when your chosen accounting service, whether it's an accountant, accounting software, or a beautiful combination of the two (see: Ember), is dedicated solely to the management of your sole trader accounts. (See, you've not even signed up yet and we're already telling you how you can save with us).

Advertising & Marketing

Whether you're looking to generate leads, attract new clients or simply raise awareness around your business, advertising and marketing costs are a worthwhile expense — and fortunately classify as an allowable expense, too.

Both one off and ongoing advertising and marketing expenses fall under this category, and include the following:

  • Advertising in newspapers, directories and online ads
  • Bulk mail advertising
  • Free samples
  • Website costs, including securing a domain name and maintenance costs

You cannot, however, claim for entertaining clients or event hospitality, so it might be best to think twice before taking that client out for dinner at The Savoy.

Business insurance

You can claim for any insurance policy for your business, including public liability insurance, professional indemnity insurance and employers' liability insurance.

Business premises

If you're looking to rent an office or co-working space, you're in luck — these expenses count as allowable expenses.

For sole traders looking to work from home, the rules on what you can and can't claim are slightly different. Have a look at our article 'What expenses can I claim when working from home?' to find out more.

You cannot, however, claim expenses or allowances for buying a building premises, but can claim for repairs and maintenance on both the premises and equipment.

Clothing

Although you can't successfully claim for a suit or casual wear, HMRC does consider protective clothing, such as protective gloves and aprons, or clothing that can be classified as 'uniform,' for example a branded polo shirt, as allowable expenses.

Financial costs

You can claim business expenses for the following:

  • Bank, overdraft and credit card charges
  • Interest on bank and business loans
  • Hire purchase interest
  • Leasing payments
  • Alternative finance payments, such as Islamic finance

It's important to note here that the amount you can claim is dependent on the way you manage your accounts. HMRC states that if you're using cash basis accounting, you can only claim up to £500 in interest and bank charges. You also cannot claim for bad debt if you use cash basis accounting, as you only record income you've successfully received. (At Ember, we use a traditional method of accounting, so you won't have to worry about this.)

Regardless of the accounting method you use, HMRC states that you cannot claim on:

  • Debt not included in turnover
  • Debts related to the disposal of fixed assets
  • Bad debts that aren't correctly calculated

In a similar vein to accounting costs, as long as the legal fees you're claiming for are directly related to your business, HMRC will accept these as allowable expenses.

Software licensing

As mentioned above, it's important you delineate between the software you use for business purposes and the software you use for personal use. For example, while it is highly unlikely you'll be able to claim for your Netflix account, you should be able to claim for your subscription to Office 365, Figma or Adobe, as long as the software is evidently used for business purposes.

Staff costs

Even as a sole trader, it's still possible to take on employees should you need the support. If you choose to do so, you can claim for the following expenses:

  • Employee staff or salaries
  • Bonuses
  • Pensions
  • Benefits
  • Agency fees
  • Subcontractors
  • Employer's National Insurance
  • Employee uniforms
  • Training courses

Stationery and office supplies

HMRC allows you to claim for items that you'd typically use for less than 2 years, such as:

  • Phone, mobile, fax and internet bills
  • Postage
  • Stationery
  • Printing, printer ink and cartridges
  • Computer software used by the business for less than 2 years, or;
  • Computer software used by the business if you make regular payments to renew the licence — even if you use it for more than 2 years
Charts in Ember app

For office supplies that you'll keep for a period longer than 2 years, such as computers and printers, you can claim as allowable expenses if you use cash basis accounting, or capital allowances if you use on traditional accounting.

Stock and materials

You can claim allowable business expenses for stock, raw materials and the direct costs from producing goods, but cannot claim for any good or material purchased for private use, or the depreciation of any equipment.

Subscriptions

To claim for subscriptions, the subscription in question must be relevant to the business, such as trade or professional journals, or a trader body or professional organisation membership if related to your business.

You cannot claim for payments to political parties, gym membership fees or donations to charity.

Travel expenses

Whether it's travelling to meet a client or crossing the country for a business trip, as a sole trader it's likely you'll find yourself racking up a fair few travel costs. Unfortunately you cannot claim for the commute, but you can claim for the following business travel-related expenses:

  • Vehicle insurance
  • Repairs and servicing
  • Fuel
  • Parking
  • Hire charges
  • Vehicle licence fees
  • Train, bus, air and taxi fares
  • Hotel rooms
  • Meals on overnight business trips
If you use a vehicle for business purposes, whether it's a company van or your own personal car, you might be eligible to claim business mileage allowance. You cannot, however, claim for fines incurred while driving to and from business trips, nor claim for non-business related trips.

Simplified expenses

If you found the above to be quite a lot to wrap your head around, luckily HMRC has come up with a solution to make managing your taxes a little less, well, taxing.

Simplified expenses are a way of working out some of your business expenses, using flat rates instead of calculating your actual business costs.

According to HMRC, you can use flat rates for:

  • Business costs for some vehicles
  • Working from home
  • Living in your business premises

Gov.uk has also developed a simplified expenses checker to help you decide whether it's worthwhile using simplified expenses to calculate your costs, or if it's better to work out your costs manually.

Summary

When it comes to submitting your Self Assessment at the end of the year, knowing what exactly classifies as an allowable expense, as well as knowing the difference between business and personal expenses, can not only reduce the total amount of Income Tax owed, but can keep you out of hot water with HMRC.

With Ember, not only do we make it easy for you to record expenses with our receipt capture technology, but with our Pro Plan we'll create and file your Self Assessment directly to HMRC, free of charge.

Join us in creating the new age of accounting.

Simple language, simple software, so that you can spend less time dealing with admin and more time focusing on what really matters.

Rachel Cameron-Potter

Rachel is a Content Marketer at Ember with a love of writing, editing and all things creative. After graduating from York with a degree in English, Rachel has dabbled extensively in content creation, working as a fundraising lead for a letterpress studio, a digital marketer on a political campaign, a magazine editor, voice over artist and freelance writer.