As a self-employed sole trader, no doubt your biggest priority is to boost your profit and pay yourself a decent wage. You are, of course, required to pay income tax on your profit – but are you paying too much? To maximise your income, it is essential to understand every tax relief you are entitled to claim, including relief on business expenses.
Sole traders are entitled to deduct business costs from their profit to reduce their overall income tax bill. Allowable expenses include things like rent, business mileage and overheads. The golden rule is that the expense incurred must be wholly for business purposes.
Many sole traders miss out on claiming expenses due to a lack of knowledge about what is and isn’t an allowable expense or due to poor record keeping. Conversely, many run into trouble for claiming tax back on expenses that are disallowed, which can result in a costly fine.
If you are unsure of what expenses you can claim as a sole trader, then read our helpful guide below. For more detailed advice about expenses and information about our sole trader accounting services, please contact the team at Ascott Blake.
What are allowable business expenses?
The main thing to remember when it comes to claiming tax relief on business costs is that you can only claim expenses incurred wholly for the business. This is what is classed as allowable expenses.
Expenses incurred for personal use, even in part, are usually disallowed. However, it may be possible to claim for the proportion of business use. It can be a tricky area to navigate and what is and isn’t an allowable business expense is not always clear-cut. That is why it is invaluable to consult a professional accountant.
Allowable expenses guide for sole traders
As a sole trader, it (literally) pays to have a good understanding of what expenses are tax deductible or find a good tax accountant that can deal with expenses for you.
The cost of an accountant can soon level out with the savings you make each year and will give you peace of mind that you are not paying too much tax – or falling foul of HMRC.
Here is our guide to what expenses you can claim as a sole trader, i.e. allowable expenses. While this list is detailed, it is not exhaustive, and there may be industry-specific exceptions and additions. For more tailored advice on what reliefs apply to your particular industry, then please feel free to get in touch with our experts at Ascott Blake.
Travel
Unless you work entirely online, travel is an essential part of running a business, whether it is for networking events, visiting suppliers or making home visits to customers.
You can claim for business-related travel costs, such as mileage and public transport. You can also claim tax relief on costs related to overnight business trips, such as meals and hotels. If you own a vehicle used for work, then you may also claim for vehicle insurance, repairs, servicing, fuel and parking.
It is important to remember that travel is only a tax-deductible business cost if it is solely for work and not combined with leisure or personal errand.
Business premises costs
If you work from business premises other than your home, you can claim expenses on rent, rates, power and insurance costs. Consumables such as stationery are also allowable expenses.
Working from home costs
If you run your business from home, then you can claim for a portion of the associated costs. Examples of tax-deductible household expenses include rent, mortgage interest, electricity bill, council tax, broadband, phone lines and water.
There are two methods of working out the proportion of your home expenses incurred for business purposes. You can use the simplified expenses system, whereby you use a flat rate to calculate your allowable expenses depending on how much time you work from home:
- 25-50 hours: £10 per month
- 51-100 hours: £18 per month
- 101 hours or more: £26 per month
Then there is the analyse the costs method, which requires you to calculate the proportion of business versus personal use.
Government guidelines suggest you do this on the basis of area (metres squared), usage (e.g. how much electricity/water/gas is used) and time spent (hours). This is, of course, far more complex but can provide a fairer result. An accountant can help you with the calculation, saving you precious time and a headache!
Specialist clothing and uniforms
If you are required to wear a uniform or protective clothing for work, then it is usually tax deductible. This extends to costumes and outfits for performers in some cases.
Stock
If you deal in goods, then you can claim relief on the cost of your stock. If you manufacture goods, you can claim tax relief on raw materials and the direct costs of producing the goods.
Legal and financial fees
Solicitor and accountant fees qualify as allowable business expenses. Another good reason to invest in the advice of a good accountant!
Promotion
Allowable expenses extend to the promotion and marketing of your services or goods, including mailshots, press advertising, online advertising and website costs.
Insurance, subscriptions and professional fees
Insurance premiums, such as professional indemnity insurance, are allowable expenses. So are professional fees and subscriptions to professional bodies, e.g. the Royal College of Nursing.
Training
Training courses are only tax deductible if they are to further or update existing skills which you require to do your job. You cannot claim for courses to learn brand new skills.
What are disallowable expenses?
Any cost incurred for personal benefit is likely to be disallowed. Here is a list of the most common expenses that are disallowed when it comes to self-assessment expenses.
- Travel to and from your main place of work
- Entertaining staff or clients
- Fines and penalties
- Everyday or business clothing
- Everyday meals
- Training costs for new skills (training is tax deductible if it is to enhance your current specialism)
- Your own salary
- Payments to political parties
- Charitable donations
- Personal memberships, e.g. gym memberships
How and when do you claim business expenses as a sole trader?
Regardless of the type of expense, it is essential to keep an accurate record of your expenditure. A lot of sole traders prefer to have a separate bank account for business transactions which keeps things clear-cut and easier to track.
With the introduction of Making Tax Digital, all sole traders earning more than £10,000 must submit their income tax return in approved software from April 2023. So this is an ideal time to adopt cloud accounting software, such as Xero, which will help you log your expenses with more accuracy and ease.
When it comes to claiming business expenses, this is usually done in the same tax year as the expense is incurred. However, HMRC will allow you to backdate expenses in some cases, e.g. for your pre-trading period.
You should calculate your allowable expenses for the year and include the figure in your income tax return. This will be deducted to calculate your taxable profit, i.e. the amount you have to pay tax on. With the introduction of Making Tax Digital, this will become a far easier task as accounting software can automatically calculate and transfer the data to HMRC.
What records do I need to keep as a sole trader?
As a sole trader, you are required to keep records of all of your income and expenditure, including invoices, receipts and salary details. Although you are not required to file proof along with your self-assessment tax return, by law, you should keep financial records for five years in case you are subject to an HMRC inspection.
How can Ascott Blake help you with sole trader accounting?
At Ascott Blake, we help many sole traders to establish their self-employed businesses. We provide guidance in the early days and take the hassle out of paperwork so that our clients can concentrate on getting their business off the ground. They enjoy complete peace of mind knowing that we are on hand to help them establish good accounting processes, as well as assist with their annual accounts and self-assessment tax return.
We provide a full range of sole trader accounts services, including assistance with registration, bookkeeping and expenses:
So to make the most of your sole trader business and plot your course for a successful future, contact Ascott Blake.
FAQs
Are capital allowances the same as expenses?
Whereas business expenses are generally short-term, ongoing expenses, e.g. rent, stationery, capital allowances are for large assets that are likely to stay in the business for longer than 12 months, such as vehicles and electrical equipment. You can offset these assets against your profit to reduce your tax bill as you do business expenses, but the conditions and processes are different.
Do sole traders pay capital gains tax?
Sole traders must pay tax on any profit made when selling or gifting an asset (known as ‘disposing’ of an asset). Tax is only payable on the profit you have made, not the total price.
Can sole traders claim expenses for food?
You cannot claim for everyday meals, but you can claim for food if you are staying overnight on a business trip.
Can I claim clothing or shoes as expenses?
You can only claim for clothing or shoes if they are specialist and necessary to do your job. This includes PPE equipment and uniforms. You can’t claim for business wear or everyday clothes.
What expenses can I claim without receipts?
It is usually still possible to claim tax on allowable expenses without a receipt. As long as you have a written record of the purchase or a detailed bank statement, that should be enough to satisfy HMRC. It is always worth checking with your accountant, however.
Conclusion
Sole traders should be aware of what business expenses they can and cannot claim tax relief on in order to maximise their profit. Allowable expenses are sometimes a grey area, so it is beneficial to consult a professional accountant to ensure you know what you are entitled to claim.
