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Freelancer's Guide: What business expenses can you claim as a self-employed person in the UK?

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If you're self-employed, you have to submit a self-assessment tax return to HMRC every year to make sure you pay the right tax. You only have to pay tax on the profit that your business makes, not your total earnings. To calculate this, just deduct your business expenses from self-employed income. You can also claim a discount on the money you have invested in the tools needed to run your business known as capital allowances. And you can deduct any losses from the previous year. As well as the main tax return, you also have to fill out a self-employment supplement form. If your turnover is less than £83000 per year, you can even use the shorter version, and if more than this amount, you need to do a long one. Making sure you file your tax return by the deadline is important.

If you're submitting a paper return you have until 31st October and if it's online, you have until 31st January. You also may be asked to make a payment on the account, this means you have to settle up last year's tax bills by the 31st of January plus pay an installment towards next year. You then pay the next installment by 31st of July. If you miss the deadline or include any incorrect information you could be fined, so do make sure you allow plenty of time before the deadline.

When you’re completing your Self-Assessment tax return, you’ll need to work out your expenses, as you can subtract some of these from your turnover to work out your taxable profit.

What are allowable expenses?

HMRC places clear rules into what you can and can't include in your costs, and that is the costs that you include are called allowable expenses. This means that you can only deduct expenses that are strictly related to your business.

For example, if your business earns £40,000 in a tax year, and allowable expenses add up to £10,000. Then you only need to pay a tax on £30,000, which is your taxable profit.

HMRC lets you subtract these costs from your business' profit. This means having a clear understanding of your business' allowable expenses will ensure you pay the right amount when submitting your self-assessment tax return at the end of the tax year.

Thus for self-employed expenses to be classified as allowable expenses, they must have been incurred due to running your business. So to start with, one must stay organized and keep a record of the invoices entering and leaving your business.

What allowable expenses can I claim for in self-employed taxes?

The first question that would come to your mind about self-employed allowable expenses is what all expenses can I claim for? HMRC have very strict rules on what you’re allowed to claim as expenses when you're self-employed, so it pays to understand them before filling out your tax return.

Knowing what and how much you can and can't claim to reduce your tax can be a bit tricky. So here’s a quick overview of the expenses that are allowed and the ones that are not.

If you use something for both business and personal reasons, you can only claim allowable expenses for the business costs. Here is an example of a breakdown of how you can take business expenses out of personal expenses.

Simplified Expenses: What are they and Who Can Claim them?

If all this sounds very complicated and you need a simpler way to work this out, you can be in luck here.

Simplified expenses are a way of calculating allowable business expenses using a flat rate, instead of working out Individual costs on a case by case basis. This can be an optional way of claiming a return on your taxes, saving time and effort.

But there are certain limitations here. Simplified expenses can be used by sole traders and businesses that have no companies as partners. They can be used by limited companies or business partnerships involving a limited company.  You can only use these simplified flat rates for the business costs for vehicles, if you work from home, or if you’re also living in your business premises.

You can find the flat rates for vehicles, work from home costs, and costs of your business premises by using the Government’s simplified expenses checker. You can also compare what you can claim using simplified expenses with what you can claim by working out the actual costs to help you work out if simplified expenses suit your business.

How to claim allowable expenses

The trickiest part here is to keep a record of all expenses leaving your business. Mostly the spreadsheets are going to help you keep complete track of your expenses. To stay organized, track your expenses on a weekly basis and keep a record of all the business expenses that you're liable to receive tax relief on so that you don't lose any money on that.

Keeping accurate records is important as you could be fined by HMRC for submitting incorrect information. Add up all of your allowable expenses for the tax year and track the total amount on your Self-Assessment Tax Return. It is best to keep a copy of proof at this stage so that you’re prepared to keep the correct records and produce them if asked by the HMRC.

Another rule of thumb to follow is to keep the receipts for every purchase you incur when running your business. HMRC dictates that receipts must be kept for six years after you've filed your tax return. They could decide to investigate your business' finances at any time within this period, so it's better to be safe in the first place.

Thus running a business is expensive but claiming back allowable expenses can ease down the financial burden that goes with being self-employed. So the best way to manage this is by staying organized, keeping accurate records of all expenses, submitting your allowable expenses returns to HMRC. And if you're unsure of what you're required to submit, the best thing to do is get in touch with HMRC directly for advice. That way you'll know you've done everything by the book and won't be blindsided by any surprise penalties.