Nobody wants to pay more tax than they need to, and there is no reason why you should pay more than your fair share. So, in this post, we’re going to look at the different allowances and tax reliefs that a self-employed person can claim.
This isn’t tax avoidance, or any kind of shady practice. This is simply using the allowances that are genuinely available for you to use in the course of your self-employment.
Tax relief and tax allowances are a massive subject, so whilst we can’t possibly hope to cover every single aspect, we’ll do our best to give you an idea of the rules.
Personal tax allowances
The trading allowance
You’re allowed to earn up to £1,000 through self-employment – tax free, and without reporting it to HMRC. The Trading Allowance (or hobby allowance as it is often called) is particularly useful, because it allows people to dip their toes into the water of self-employment without the burden of completing a Self Assessment tax return.
Many people start working as a self-employed individual whilst they are still employed, and they may only sell a little bit of stuff or do the odd job on the side.
Just note that if you claim this, then you can’t offset any business expenses against your tax – it’s the allowance or expenses. So do think carefully about which way is most beneficial to you!
The personal tax allowance
UK taxpayers get a personal tax allowance (£12,570 for 2022/23). This means that you can earn up to this value, and you’ll only start paying tax on the income you make over this amount.
If your partner isn’t working or has a very low paid job, then they can also opt to transfer part of their personal allowance to you.
You can also use the dividend allowance of £2,000 if you’re a shareholder who receives dividend payments, which is particularly good news if you are the owner of your own limited company! You can use the dividend allowance as well as the personal tax free allowance.
Understanding the meaning of business use
There’s an important rule that you need to be aware of before we start talking about what expenses you can claim against your tax.
This means that if you want to claim something as a business expense, then you must show that the cost was wholly incurred as a result of your business. For instance:
- If you buy a computer that you only ever use for doing your accounts and updating your business website, then this is purely a business expense and so it’s allowable.
- If you buy a laptop for your child to do their homework on, then that would not be allowable because it is for private use.
What about split usage expenses?
If you can show how the usage is split between business and personal, then you can claim the business part.
Imagine you buy a TV to watch a business programme on but the rest of the time you just use it as a family TV. It would be difficult to split private and business use, so it wouldn’t be allowable.
But, if you bought a dozen toilet rolls, kept six at home and took six to the office, then you can claim for half of the cost because you’re using half of them for your business.
Claiming business expenses against tax
As a self-employed person you are allowed to claim for expenses that are incurred in the course of your work. Remember though that if you claimed the trading allowance you cannot do this.
Business expenses can be things like:
- Office rental
- Office supplies
- Website hosting
- Software subscriptions
- Vehicle costs
- Training courses (as long as they are related to your business)
You do need to make sure you are properly recording these expenses (using an awesome system like Pandle!) so that you can prove how much you have spent and when you spent it.
If you make any splits for mixed business/personal use, then you need to keep accurate notes to show your thinking. If you do get a visit from HMRC and they disagree with you, it’s useful to be able to show them your thought process, and that you were acting carefully – even if you were wrong. You’ll be less likely to incur a penalty. Read our article about restrictions on claiming business expenses for more information.
Using simplified expenses
HMRC has a handy scheme that allows self-employed people and some partnerships to use a simplified method of calculating expenses, and apply a flat rate to things like vehicles and working from home, so that you don’t have to go through the process of working out what belongs where.
This is really useful if you have a small business that doesn’t have a huge amount of activity because, as the name implies, it does make things simpler. That said, simplified expenses aren’t always a good idea if you have a larger, more active business.
Tax relief and allowances for paying staff
If you employ someone then you can offset some of the costs against your tax bill, such as:
- Employer’s National Insurance contributions (up to £4,000 using the Employment Allowance)
- Pension costs
- Qualifying life assurance
- Staff welfare
- Agency costs
- Training courses
- Uniforms (as long as they are only used for the business
Buying assets for your business
Expenses are for things that tend to get used up quickly (normally in less than one year) in your business, but what happens if you buy something that lasts longer, like a van?
The simplified way
In the simplified method, you keep a record of the business mileage that you do in your vehicle, and then multiply that by the appropriate rate to find out how much is allowable against tax.
You can’t claim the initial purchase price, but you can claim a percentage of the cost of owning and running the vehicle with every mile that you do.
For cars and vans, you can claim 45p per mile for the first 10,000 miles per year, and 25p per mile thereafter.
|Year 1||9,000 miles|
|The first 10,000 miles are paid at 45p per mile||9,000 miles at 45p per mile: £4,050|
|Total allowable amount in Year 1||£4,050|
|Year 2||15,000 miles|
The first 10,000 miles are paid at 45p per mile
Over 10,000 miles at 25p per mile
|Total amount allowable Year 2
£4,500 + £1,250
In the traditional accounting method, you can claim the actual cost of things like insurance, fuel, servicing etc., and then a further amount to compensate for deprecation called a ‘Capital Allowance’.
Capital Allowances let you charge a percentage of the car cost against your tax bill dependent upon the value and CO2 emissions of the vehicle. You can also use capital allowances for other assets which aren’t eligible for the simplified method.
Other useful allowances
There are a few other costs that are allowable against tax for self-employed people.
A good example of this is if you’re the member of a professional body. You can claim the cost of your membership subscription, and any associated Continuing Professional Development (CPD) that is required as a result. Many professions are also required to hold specific insurance, such as professional indemnity, and this is also an allowable expense.
If you aren’t contributing to a pension, then you should be. Even if you can only afford a few pounds a month it’s better than nothing, and the good news is that your pension contributions are very tax efficient.
Research and development
If you are carrying out research and development, there is a further tax allowance that you need to be aware of, but it’s not available to self-employed individuals. Research and Development tax credit is only allowable for limited companies that pay Corporation Tax.
Why are we telling you this? Well at the small companies’ rate, it pays 230% of the value of the R&D as a tax credit to be offset against your tax bill.
Many people start developing or researching when they are self-employed and, in this case, it may be worth speaking with an advisor and forming a limited company with the express purpose of developing your idea, rather than staying self-employed. You can even claim the associated costs of any advice from solicitors and accountants when you set the new company up too.
If you are a kind individual and make donations to a registered charity, then these are also something that you can offset against your tax bill too.
Keeping records so you can claim tax relief and allowances
One of the first pieces of advice any accountant or bookkeeper gives a client tends to be about record keeping, and with good reason. It makes it much easier to make sure that you claim for everything that you’re allowed to (which is good for your tax bill), and it’s also crucial for staying out of trouble with HMRC.
From 6 April 2024, Making Tax Digital (MTD) is being introduced for Income Tax Self-Assessment (ITSA) which means that you will need to keep records and submit your Self Assessment tax return to HMRC digitally.