As a sole trader, you’ll be used to handling everything yourself. From marketing to sales, and everything in-between, it’s down to you. It means that you’re also liable for everything financially, including those tax bills. That’s where expenses come in.
It might not sound very exciting, but keeping track of your expenses can significantly reduce your tax bill. This is because you only pay tax on your profits; the difference between your business income, and what you spend to make it.
Not all expenses can be claimed for, so what are allowable expenses? What can you claim for, and when can you claim? We’re glad you asked, we’ll cover all this and more right here.
If you run a limited company, your business will need to follow different rules.
What are allowable expenses?
We’re focusing on allowable expenses for sole traders here. In this instance, expenses are costs that you’re able to deduct from income to calculate your taxable profits.
If you earn £50,000 in a year as a sole trader and claim for £10,000 of allowable business expenses, then you will only pay tax on £40,000. The £40,000 makes up your taxable profit. Allowable tax expenses can significantly reduce your tax bills.
What business expenses can I claim for as a sole trader?
As a general rule of thumb, you are able to claim expenses for any product or service used to support your undertaking as a sole trader. It will naturally vary, depending on whether you work in your own home, or are based externally or travel for work, for example.
It also goes without saying that all expenses must be related to your business activity. Make sure you don’t include any private purchases you make through the business!
Allowable expenses include but aren’t limited to:
- Office costs – This includes everything from stationery, rent, postage and utility bills.
- Travel expenses – From vehicle insurance to fuel, parking and hotel rooms, to train fares and breakdown cover, if you travel as part of your work as a sole trader, you may be able to claim expenses. Just note that this doesn’t include your commute when you travel to your usual place of work.
- Clothing – This covers uniforms and anything you need to wear to carry out your work as a sole trader. For instance, protective clothing, or costumes for actors and entertainers. You aren’t able to claim for everyday clothes, even if you only wear these items for work.
- Reselling goods – If you’ve bought things to sell on as part of your business, including stock or raw materials, those are included in your allowable expenses.
- Legal and financial costs – You can claim for the fees spent on hiring accountants or professional services such as lawyers, as well as for bank charges or hire purchase interest.
- Marketing, entertainment and subscriptions – Allowable expenses in this category include free samples and website costs, but you aren’t able to claim for entertaining clients.
- Training courses – Providing the courses relate to your business and improve your skills or knowledge then you are able to claim allowable expenses. It does not include courses taken to help you expand into new areas of business.
How do I to keep track of business expenses?
There are three simple steps we recommend every sole trader follows to keep their expenses in order. It will also help make filing your Self Assessment tax return simpler!
Keep your receipts!
Having read through all of the allowable expenses you’re able to claim for, you’ll see how easy it is to rack up countless receipts over the year. Keep a record of your expenses. We know it’s obvious, but we also know that working for yourself can be really full on.
Not filing a fuel receipt or saving the bill for your work uniform is all too easy to do in between juggling clients and running your business. Just remember that future-you will really appreciate it when calculating your allowable expenses.
Schedule in time
Get into the habit of filing every receipt, or logging business miles travelled for example, at the end of each day. Set a reminder in your calendar to make it easier to remember.
That way you’ll only need to spend a few minutes organising your expenses each day, rather than reaching the end of the tax year and starting from scratch. Daily might not always be possible, but try to be as regular as you can. It’ll benefit you in the longer term.
Use accounting software
If you don’t already use an online accounting tool, now is the time to start exploring your options. Pandle is our very own cloud-based bookkeeping software, which is available as a web app and mobile app.
The Receipt Upload feature means you can take a picture of your receipts and other documents, and attach the image to the relevant transaction, so all your records are in one place.
No more searching through bags or rooting through unorganised piles! Having categorised and dated records of your expenses makes completing your Self Assessment – and ultimately reducing your taxable profit – much easier.
How do I actually claim my business expenses?
You’ve got all of your expenses organised and know how much you are able to claim for. You’re half way there! Your expenses are claimed through your yearly Self Assessment. There aren’t any extra forms or paperwork you need to complete, it’s all part of the same process. Just ensure that the expenses you include on your return relate to the same accounting period used to report your income.
You might also be surprised to learn that you don’t need to submit any proof of expenses on your tax return. It’s important that you still keep them for your own records though. HMRC could request to see them at any time!
Can I claim for something I use for business and for personal reasons?
Yes, but you won’t be able to claim against the full amount of the expense, only against the proportion you use for business purposes.
For example, if you don’t have a separate business phone, you likely use your mobile phone for both business and personal reasons. If you spend £100 in a year on your phone bill, if £30 of that bill is for personal calls and £70 on business, then you can claim for £70 of expenses.
It can get a bit more complicated if you work from home, as the expenses you can claim for include everything from gas and electricity, to council tax. You’ll need to work out how many hours you work from home for, and how much of your house is used for business purposes.
What are simplified expenses and why would I use them?
Simplified expenses do what they say on the tin. They make claiming expenses much easier by using a flat rate for expenses. The flat rate method can be used for expenses such as vehicles, or working from home. It means that you won’t need to work out the proportion you use for the business.
Instead, you can apply a flat rate to work them out. You’ll still need to keep a record of your mileage, time spent working from home, and how many people have lived at your business premises over the tax year.
Sole traders are able to use simplified expenses, but they may not always be right for you, especially if there’s a high chance you’ll be left out-of-pocket. Use the government’s checker tool to work out if this is a good option for you.
Interested in finding out more about how Pandle can help you with your expenses? Create a free account and discover more.