What Are Allowable Expenses?
Are you a small business owner? If so, you’ve probably already realized that maintaining a business is not cheap. There are lots of expenses to consider: payroll, health insurance costs, overhead costs, and more. It can be tempting to write off some of these expenses as business-related when they’re actually personal.
But here’s the thing: You can’t do that! As a small business owner, you must understand what expenses are allowable for tax purposes and which aren’t. In this article, we’ll review the different types of allowable expenses for self-employed people to ensure you’re getting the most out of your money.
What Are Allowable Expenses for Self-Employed People?
Allowable expenses are those directly related to your business and have been incurred or paid out by you. They do not include personal costs or capital expenditures. Some examples of allowable expenses may consist of the following:
- Using your home for business purposes – If you work from home, you can claim a proportionate amount of the rent, mortgage interest, and running costs for the property as an allowable expense. You should keep evidence of the amount you spend on items such as lighting, heating & hot water, and council tax (if liable). Also, keep maintenance & repairs bills and other outgoings relating to your home offices, such as utility bills and insurance premiums.
- Travel costs – You can claim all reasonable travel costs for business purposes. These include mileage allowance, parking fees, tolls, and taxi fares while away overnight. You can also claim bus and train tickets and cabs/other transport services like minicabs/taxis, which must be booked by phone at least one day in advance.
Business vs. Personal Expenses: What’s the Difference
Business expenses are those you incur in the course of running your business. They’re allowable deductions from your taxable profits and can be used to reduce your overall tax burden.
Personal expenses, on the other hand, relate to you as an individual rather than your company or business. They typically include clothing and grooming, travel costs (excluding work-related ones), entertainment and socializing with clients or customers at restaurants, meals out when not travelling on business trips, and childcare costs if appropriate.
Types of Allowable Expenses in The UK
One of the first things you’ll need to do to set up your self-employment business is work out what expenses you can claim. You’ll be able to offset some of these against your profits, so it’s vital to understand how to claim for these expenses.
The most common expenses for self-employed people include the following:
- Office costs – e.g., rent and rates, heating, lighting and cleaning services, insurance for office contents
- Travel costs- e.g., petrol for journeys between home and place of work, bus or rail tickets, mileage allowance for using your car for business purposes (if your employer does not own it)
- Telephone/internet costs – e.g., the monthly bill for landline telephone or mobile phone used for business purposes (but not private calls)
- Stationery/postage – e.g., pens, paperclips, etc., used in your work; stamps used on mailings promoting your business (but don’t include private letters); postage on items such as invoices sent out to customers with orders placed by them or payments received from them; courier charges if you need something urgently
Claiming Allowable Expenses in the UK
As a self-employed person, you may have to pay a lot of your expenses. For example, if you are a sole trader or in a partnership and use your car for business purposes, you will have to pay a 20% extra tax on running that car.
This is called the Benefit in Kind (BIK) charge. You can reduce your BIK charge by claiming allowable expenses on your tax return at the end of each year. To claim allowable expenses, you need to keep records of all your business expenditures and receipts for everything you buy for your business.
If you don’t keep records of everything you spend, HM Revenue & Customs (HMRC) may refuse to accept any claims or reject some items as being too high.
When do I need to make my claim?
You must submit an annual tax return and make any claims within 12 months from when you made the purchase or incurred an expense. If you don’t submit your return by this deadline, HMRC will not allow any claims for that year and may ask for repayment of amounts already paid out if they think it was spent inappropriately!
What Expenses Are Non-allowable When Filing Taxes?
If you have a business, you’re required to pay taxes on your income. This includes self-employed, freelancers, and people who make money from services. For the self-employed, some expenses are non-allowable when filing taxes in the UK. Such scenarios include;
- If you’ve already used your 1,000 GBP tax-free trading allowance, which exempts you from some taxes on earned income from self-employment, casual services, or hiring out personal items.
- If you have expenses that are not allowable when filing taxes in the UK as self-employed. These include:
- Credit card charges for buying petrol and food.
- Cost of diesel to run your car (unless it’s a company car).
- Business costs that are personal and which have been reimbursed by the company (such as meals and entertainment).
- Expenses incurred while working abroad (such as accommodation costs or travel costs).
Here’s how to calculate your allowable expenses
To calculate your taxable income, subtract allowable expenses from your total income.
- Allowable expenses are any costs you incur while running your business that can be written off as tax-deductible.
Allowable expenses can include:
- Cost of goods sold (COGS)—the cost of producing and selling a product or service
- Rent paid on the office space where you work
- Advertising expenses, including those incurred on social media platforms such as Facebook and Twitter
The total amount of allowable expenses should be subtracted from the total amount of earned income to arrive at a taxable profit figure.
You can deduct various business expenses from your income. However, when claiming these deductions, there are limits on what is allowed and what’s not. It’s essential to keep good records of all your expenses while working as an individual or sole trader so that they’ll be easier to claim when filing taxes at the end of each year.