In a world filled with mass-produced honey, BeeHype, a UK-based honey business founded by partners Stela and Momchil, is on a mission to reinvent perceptions...
Allowable expenses are costs you’ve incurred in running your business. If you’re self-employed or run certain types of business entities in the UK, you’ll need to subtract business allowable expenses from your overall revenue when you’re calculating your taxable profits for HMRC.
But what are allowable expenses exactly? This guide has you covered.
|📝 Table of contents:|
Allowable expenses are costs which arise in the everyday running of your business. We’ll look in more detail in a moment at some examples of tax allowable expenses - but common ones include the cost of running your office, paying your staff, or buying business supplies.
Allowable expenses aren’t taxable. If you’re self-employed, allowable expenses such as stock and raw materials can be deducted from your overall revenue to calculate your taxable profits.
Most business types can also deduct allowable expenses - but the rules are different for limited companies. If you run a limited company it’s worth getting professional advice to make sure you’re fulfilling all your tax obligations.
Allowable expenses can only be costs associated with your business. You can’t include personal expenses in your calculation.
With some things that might be pretty straightforward - paying a supplier for some stock, for example. But in other cases - particularly for freelancers and self-employed people - this may get a little trickier.
Let’s say, for example, that you have a mobile phone contract, but you use the phone for both work calls and personal calls. In this case you’d need to work out what proportion of your monthly bill can be attributed to your work costs, and include only that in your allowable expense calculation.
Wise Business can help self-employed people to manage their business finances with ease. Paying suppliers, spending on behalf of your business or getting paid by international customers is simpler with Wise Business multi-currency account. Using Wise Business you will always get the real mid-market exchange rate, together with useful features to make your finance management more convenient.
In this article we'll focus on allowable expenses for self-employed people, so if you run a limited company the approach you take to allowable expenses will have to be different. In this case, you’ll deduct business costs from your profits before tax. You’ll also need to keep track of any business items you make personal use of - this may have to be reported to HMRC as a company benefit.
Here’s a run through some of the types of allowable expenses you may run into - not all of these will apply to all self employed people¹:
- Costs of running an office or business premises - such as business rates, utilities, phone bills and stationery
- Costs of paying suppliers, staff and subcontractors
- Financial costs like insurance
- Advertising and marketing costs
- Staff training and uniform costs
- Travel costs for business travel
We touched earlier on the importance of splitting out personal and business expenses. Another common example of this is when freelancers work from home. In this case, you may be able to claim a portion of your internet bill, heating or even council tax as an allowable expense. However, you’ll need to come up with a reasonable method for dividing up how much of your overall cost is personal, and how much is for your business.
One option HMRC gives as an example, is to divide the costs of a specific utility bill by the number of rooms in your house.
|💡 If you have 4 rooms, and use only 1 of them as an office, you can then claim 25% of the bill, assuming all the rooms use around the same amount of heating or electricity.|
In order to claim allowable expenses you’ll need to include them on your self-assessment tax return². Keep track of all your bank statements, receipts and so on throughout the year, to make it easier to file your self-assessment tax return.
Usually you’ll need to complete a self assessment tax return if you earn 1,000 GBP or more in a tax year as a sole trader, or if you’re a partner in a partnership. Here’s an outline of the basic steps to take:
- Register for self assessment - for the 2021-22 tax year, the deadline for registration is 5 October 2022³
- Complete your tax return online or in paper form
- File it by the deadline - this varies based on whether you submit online or using a paper form
- HMRC will notify you of the tax you owe
- Pay your bill by 31 January
While most businesses and sole traders can claim allowable expenses, there are a few exceptions. One of these is if you’ve used your 1,000 GBP tax free trading allowance⁴ which exempts you from some tax if you’ve earned income from self employment, casual services, or hiring out personal items.
You’ll need to keep records and receipts for business expenses throughout the tax year, so you can calculate your allowable expenses for filing. Some expenses may be one off costs related to running your business - such as buying goods to sell on. Others could be ongoing costs like monthly utility bills. Keeping all your different expense types separate from each other can make it easier to check you’ve accounted for everything, so it’s a good idea to split your expenses by type, looking at:
- One off costs during the tax year
- Ongoing costs during the tax year
- Costs which may need to be split between business and personal expenses
Once you’re confident you have all the paperwork pulled together you’ll be able to add up your total allowable expenses and enter it into your self-assessment tax return. Make sure you keep receipts and evidence of your expenses in case you’re required to provide them to HMRC later.
If you’re a sole trader or have a partnership, you may be able to use the simplified expenses process⁵ instead. Only partnerships which do not include any companies as their partners will be able to consider this option - and it doesn’t suit everyone.
Under the simplified expenses process you’ll use flat rates to calculate expenses, instead of working out your actual business costs. This can be used for things like vehicles, working from home, or if you live in your business premises.
To give an example, if you work from home, you can work out how many hours per month you worked from your property. Then you can claim a flat rate based on government allowances, rather than needing to go through your utility bills and so on, and calculate the exact cost of your bills that can be attributed to business expenses.
Open a Wise Business account to make it easier to run your business and manage company finances. You’ll get a feature packed international account you can use to hold and exchange multiple currencies. Whenever you need to spend or send payments in a foreign currency, you’ll be able to access the mid-market exchange rate with low, transparent fees to cut your costs.
Sign up with Wise Business today, to make it easier to manage your finances - so you have more time to focus on your business growth.
Understanding allowable expenses is essential if you’re a self-employed worker in the UK. Use this guide as a starting point, and don’t forget to take professional advice whenever you need it, so you’ll know you’re fulfilling all your tax obligations.
Sources used for this article:
- Gov.uk - expenses if you’re self employed
- Gov.uk - self-assessment tax returns
- Gov.uk - tax return deadlines
- Gov.uk - 1,000 GBP tax-free 'trading allowance'
- Gov.uk - simplified expenses
Sources checked on 19-09-2022.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from Wise Payments Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
Having an international business and operating in different countries can often be complicated. Different time-zones, language barriers and setting up...
Discover the key features of the Wise Business account.
Reliable and efficient international payments solutions are critical to business success. At Wise, we understand paying your employees, customers or suppliers...
Opening a local business account can be a real challenge, especially if you're not a local. It often means dealing with lots of paperwork, making several...
As a business owner, paying your team members, suppliers and invoices on time and in the right amount is crucial for maintaining smooth operations. Instead of...