When running a successful business as a sole trader, there’s one thing you simply cannot avoid: tax payments. However, what if you’re already entitled to reduce your tax liabilities? In this article, we dive into HMRC’s “allowable expenses”, exploring the tax relief available for self-employed sole traders. We outline which expenses are eligible and how to claim them, as well as comparing them with (alternative) tax-free allowances. Read on for more!
What is tax relief?
A tax deduction, or “tax relief”, is a way to reduce the amount of money you owe to HMRC. For the self-employed, this commonly refers to essential business expenses or running costs which can be subtracted from your total income, thereby reducing your total taxable income. In essence, it means that you will pay less tax in your Income Tax Self Assessment.
Who can claim tax relief on expenses?
If you have used your own money to pay for products or services necessary for your job, then you might be eligible for tax relief. This is particularly relevant for self-employed people (i.e. sole traders) since your business and personal finances are not separated when it comes to paying income tax.
What can be counted as a business expense?
When calculating your income tax, certain costs can be deducted from your taxable profits – but what's eligible for a claim? The definition of “allowable expenses” can cover a surprisingly wide range, with the specifics varying between employees and the self-employed, and bookkeeping style (cash basis vs. traditional accounting).
However, typical self-employment expenses (for cash basis accounting) can include:
Office and workspace expenses
- Stationery (e.g. essential writing implements, paper, envelopes)
- Postage (e.g. stamps or shipping labels to deliver your products)
- Printing (e.g. a printer and ink cartridges, or printing costs)
- Business phone, internet, and other business-specific utility bills
- Computer software (e.g. a subscription to business services such as AbraTax)
- Rental costs for business premises
- Insurance for your business premises
- Repairs or maintenance of business premises
Clothing and travel
- A business uniform (excluding "everyday clothing")
- Protective clothing needed for your work
- Business-related fuel costs (e.g. for your car)
- Vehicle hire fees
- Parking costs
- Public transport or taxi fares (including flights)
- Hotels and meals during overnight business trips
Legal, financial and marketing costs
- Solicitors’ and accountants’ fees
- Professional indemnity insurance payments
- Interest paid on business bank loans
- Advertisements (e.g. in newspapers or on social media)
- Website costs
- Giveaways or free samples
Subscriptions and training
- Membership for relevant business/trade organisations
- Subscriptions to professional journals
- Administration skills training
- Training to improve existing business-specific skills
- Courses to update knowledge of essential technology
It is important to note that you can typically only claim tax relief on expenses for products or services which are solely used for work purposes. If you are unsure whether an item can be claimed for tax relief, HMRC recommends that you contact the Self Assessment helpline for clarification.
“Simplified expenses” for the self-employed
For certain expenses, sole traders are permitted to claim tax relief according to pre-established flat rates called “simplified expenses”. For instance, HMRC sets out standardised rates for mileage (fuel/vehicle costs), utility bills (excl. phone and internet), and living at your business premises.
This option can help to make your tax relief claim more straightforward during Self Assessment, avoiding the need to calculate precise business costs in detail. To work out which option is best for you, HMRC provides a simplified expenses checker here.
How to claim your allowable expenses?
You can claim eligible tax relief during your annual Income Tax Self Assessment process. For this reason, make sure to keep all receipts and any other evidence of your business expenses stored in a safe place. In the Self Assessment form, you will be asked to state the total amount of allowable expenses, and to subtract this from your taxable income.
Other options: capital and tax-free allowances
Capital allowances
There are some business expenses (e.g. the purchase of a vehicle) which cannot be claimed as allowable expenses on your Self Assessment but can be claimed as “capital allowances” tax relief instead. Bear in mind, however, that these cannot always be claimed if you are using "simplified expenses" (as above).
Tax-free allowances
Furthermore, as a sole trader, you are likely eligible for tax-free allowance. First and foremost, you are usually entitled to Personal Allowance, which means that you will pay no tax on income up to £12,570 (as of 2024).
An additional tax-free allowance of £1,000 can be claimed on income from property and/or trading (£1,000 each). However, “property allowance” and/or “trading allowance” cannot be used alongside tax relief claims on expenses: you must choose between them. (Furthermore, the property allowance cannot be used in conjunction with the Rent a Room scheme.)
Therefore, it is wise to compare the options and decide which will be most beneficial for you and your business.
Conclusion
In conclusion, understanding HMRC’s tax relief system (and related schemes) forms part of your essential knowledge as a sole trader. Allowable expenses represent a wide range of categories with many potential opportunities to reduce your total taxable income. The result could reduce tax payments and significantly increase the overall health of your business.
Claiming your expenses is relatively easy since it forms part of your annual Self Assessment form (something AbraTax can help to make even smoother with our free service). Just remember always to keep comprehensive financial records!