Allowable Expenses for Self-employed in the UK

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.

What are allowable expenses?

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.

Difference between business expenses vs. personal expenses

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.

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Allowable expenses for Limited Company UK

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.

Allowable expenses for Self-employed UK

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.

How to claim allowable expenses in the UK

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:

1. Register for self assessment - for the 2021-22 tax year, the deadline for registration is 5 October 2022³
2. Complete your tax return online or in paper form
3. File it by the deadline - this varies based on whether you submit online or using a paper form
4. HMRC will notify you of the tax you owe
5. Pay your bill by 31 January

When one cannot claim allowable expenses?

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.

How to calculate allowable expenses

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.

Simplified expenses in UK and how they work

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.

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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:

Sources checked on 19-09-2022.