How to Simplify Expenses
Nothing seems to go as expected when filing your income tax as a self-employed worker. You can use your calculator to crunch up the numbers but still, to no avail. With a ton load of receipts to claim, filing your income tax seems like an end-of-the-world problem.
A problem that the HMRC simplified expenses can solve.
What are simplified expenses?
Conventional means of calculating your business’s allowable expenses require you to add up every cost accrued manually. This process is a mathematical puzzle, especially for self-employed workers.
The HMRC developed the simplified expense method of accounting to help business owners file their income tax. Under this process, you use a flat rate to represent some of your allowable expenses instead of manually adding them up.
Though this method saves you time and energy in filing your taxable profits, it doesn’t necessarily result in a lesser tax. As such, it is not mandatory to apply it. You should check for its suitability for your business.
How do simplified expenses work?
Simplified expenses work by providing business owners with flat rates for their allowable expenses. The HMRC sets out the rates for the allowable expenses.
The HMRC offers a calculator to help you arrive at a sensible flat rate. They consider factors such as hours, mileage, and the number of people in a business to come up with fixed flat rates. These flat rates can then be added and claimed as deductions to reduce your taxable income.
So, who can use this method of simple accounting?
Who can use simplified expenses?
To use simplified expenses, you have to be;
- A sole trader or self-employed
- A business partnership that has no company as a partner
Having such few exceptions to this approach means that some businesses cannot access the privileges that come with simplified expenses. Such firms include those that;
- Are registered as limited companies
- Have partnerships with limited companies
Where are simplified expenses used?
Not all expenses qualify to be substituted by flat rates. Only allowable expenses make it to this shortlist.
Allowable expenses are the costs involved in running your business and should not be confused with personal purchases. Three types of allowable expenses have flat rates, including;
- Simplified expenses working from home
- Simplified vehicle mileage expense
- Simplified living at your business premises expense
Let’s discuss these allowable expenses that have flat rates;
1. How do simplified expenses working from home operate?
Whether you have a dedicated home office or working from your garage, you can use this method to save some money. When filing your income tax, the most mind-boggling thing is to calculate how much you spend on personal use and how much goes into the business.
The simplified expense approach works by offering flat rates for calculating this difference. You use the flat rates when filing your income tax. Adopting this approach saves you time and resources. It simplifies complex calculations, such as utility bills, into a single sum used by business owners working from home.
However, you must spend a minimum threshold of 25 hours working from home to qualify for the simplified working-from-home expense. Here are the flat rates offered depending on the number of hours worked.
- If you work 25 to 50 hours a month, you claim £10
- For 51 to 100 hours, you are eligible to claim £18 per month
- Above 101 hours a month, you claim £26 per month
For example, if you have worked for 30 hours in 9 months but worked for 55 hours for the other three months, you can claim;
9months x £10= £90
3 months x £18= £54
This gives a total claim of £164 from your income tax.
2. How does simplified vehicle mileage expense work?
The simplified vehicle mileage expense is for sole traders that use vehicles to run their business activities. It is a much simpler way of calculating the running cost of a vehicle, including insurance, servicing or fuel, and repairs. The automobiles eligible for this claim are;
- Cars (cars made for commercial purposes such as black cabs or dual control driving instructors cars’ don’t qualify)
- Goods vehicles, such as vans
If you use a car for both work and private use, you can claim for allowable expenses based on the mileage of your business trips. They include;
- 45p per mile for the first 10,000 miles made in cars and vehicles
- 25p per mile after 10,000 miles driven in cars and vehicles
- 24p per mile made on motorcycles
So, if your vehicle does 15,000 miles a year, your claim would be as follows;
10,000 x 45p= £4500
5,000 x 25p= £1250
The total amount to be claimed from your income tax will be £5750.
3. How does simplified living at your business premises expense work?
You might decide to live in your place of work if you run a bed and breakfast(guest house), a care home, or a motel business. You can use the simplified expense at your business to make claims. This method considers the number of people living in the business premises and calculates the flat rate.
This approach calculates the amount spent on business and private use of your premises. To calculate the amount to claim, you need to know the total expense of the premises. Then, using the flat rate stated by the HMRC below, subtract the amount used for personal use depending on the number of people;
- If one person is living on the premise, claim £350 per month
- For two people, claim £500 per month
- For three or more people, claim £650 per month
For instance, you and your partner run a small care home for a year. Your relative came to assist you for three months. What’s the claimable living expense if the premise expense is £18,000?
9 months x £500= £4500
3 months x £650= £1950
The total claimable living expense is £6450, while the business expense is;
£18,000- £6450= £11,550
Other allowable business expense
Besides working from home, vehicle, and living at your business premise expense, HRMC has a list of other allowable expenses you can claim.
While they are acceptable, most other allowable business expenses don’t have flat rates, so they do not fall under the simplified expense bracket. They include employee costs, financial and legal fees, advertising, stock, and materials.
You’ll have to manually work out the average monthly costs for these expenses and keep the working as evidence for HMRC.
Remember! Always keep a good record of your expenses! You can do this by tracking your receipts.
Simplifying expenses goes a long way in saving time and resources. As a sole trader, you should use this approach to calculate your income tax instead of hiring professional accountants or updating all your receipts to account for your claims.
Luckily, the HMRC has simplified everything for self-employed personnel. Giving flat rates to be claimed for the living at your home expense, working from home expense, and vehicle and mileage expense has made such a mind- gobbling task enjoyable.
I hope this article has helped you overcome your income tax challenges as a self-employed worker.