As a self-employed sole trader, claiming as much tax relief as possible will no doubt be one of your biggest priorities. All one-man-bands are taxed on their hard-earned profits. When you work for yourself, the last thing you want is to pay more tax than is necessary. Within this guide, we will help ensure you pay the right amount of tax as a sole trader – but not a penny more!
It doesn’t matter whether you’ve been self-employed for 12 months or 12 years, all sole traders are entitled to claim for allowances and expenditure relating to their business. If you are interested in any tax-saving opportunities as a sole trader, read on as we disclose the main business expenses you can claim for with HM Revenue and Customs (HMRC).
What is tax relief?
Tax relief can be used to offset against your taxable profits when filing a self-assessment tax return with HMRC. As a self-employed sole trader, there are income tax allowances for self-employed individuals that you should be aware of. By claiming tax relief on business expenses – i.e. costs directly linked to the running of your business – you can recoup more of your hard-earned income and pay a little less income tax.
It’s even possible to reclaim the VAT paid on goods and services for your business in your quarterly VAT returns, providing you are VAT-registered.
Keen to know what expenses are tax deductible as a sole trader? Read on as we disclose the main running costs for your business that are allowable to claim for tax relief.
What is tax deductible as a sole trader?
Claims related to uniform or work clothing
First and foremost, you can claim tax back for uniform used directly for your business. There is an HMRC laundry allowance which you can find on the GOV.uk website.
Put simply, if your clothing could be included in an “everyday wardrobe” and is not strictly for business use, it is not permissible for a work clothes tax rebate. It doesn’t just cover branded uniforms for your business. You can include the cost of protective clothing for tradesmen, while entertainers can even claim tax relief for stage costumes.
Travel and motor running expenses
Claiming travel expenses is another legitimate allowance in the eyes of HMRC, but there are some aspects of your mileage and travel that you must take into account as a sole trader.
In most cases, sole traders will not have a vehicle that’s designated exclusively for business use. Although you might use your vehicle to travel to meet customers, it’s highly likely that it will also be used for other purposes, such as doing your family grocery shopping.
That’s why allowable business expenses for vehicles are only permitted for the business element of fuel, parking, repairs, servicing, breakdown cover and insurance. Crucially, it does not cover you for travel between home and work, any speeding or parking fines incurred and any non-business driving costs.
If you do not want to claim the actual expenses of buying and running a vehicle in your business, you can use the simplified method which is to claim business mileage. You can claim for 45p per mile for the first 10,000 business miles. Anything over this figure will be claimed at a rate of 25p per mile.
You can also claim business expenses for any other business-related travel costs, such as train, air or taxi fares for business purposes, hotel rooms e.g. following an industry seminar or conference and meals during overnight business trips.
Buying or leasing vans and cars
Self-employed car expenses are an important talking point for any sole trader. You might be wondering whether you can claim the cost of buying a car or van for exclusive work use. If you buy a car or van through your business, it will be listed as a fixed asset to your firm, a form of plant and machinery. This allows you to claim capital allowances on the value of your purchase, reducing your taxable profit.
If you choose to lease a car rather than buy one for your self-employment, you can opt for one of three lease options:
- Hire Purchase
- Finance Lease
- Operating Lease
Each of these methods come with their own set of rules on how you treat them in your accounts, so worth speaking to you accounting before you commit to any of the above so you can understand the best one for you and your business.
Tools and other equipment
If you are a self-employed builder or mechanic, or any other sole trader that relies on tools or machinery to do their job, it’s possible to claim back tax on replacing and maintaining your essential equipment.
You are also entitled to claim relief when you first purchase the item and this will be done either by capital allowances or as an allowance expense, it just depends what basis you are using.
If you work from home as a sole trader, you should be able to claim a portion of your household bills even if the level of business use is minor. Your claim should be based on your total household bills, the area you’ve used and the duration you’ve used it for business purposes.
Do ensure the room(s) you use are exclusive for business purposes at the time, but there’s no issue with allowing the kids to do their homework in your office at the end of your working day. This should avoid the room being treated as commercial premises for rating purposes and also ensure you don’t pay any Capital Gains Tax when you sell your home.
What constitutes a tax deductible household expense?
There are many self-assessment expenses you can claim if you work from home, including:
- Mortgage interest (not the capital repayment aspect of your mortgage)
- Council Tax
- Property repairs
- Cleaning costs
In order to work out the proportion of household expenses you can claim for each of the above costs, you will need to determine how many rooms at home you use for work purposes and how long you spend using it for work.
Let’s say for example your property has five rooms and you use one of them Monday to Friday for business and it has private use at the weekends. You would start by calculating a fifth of your mortgage interest, rent, Council Tax, utilities bills and so forth, then you would divide by seven days a week and times by five working days. This adjusts your claim to only reflect the business use of this room.
Are training courses tax deductible?
If you are keen to improve your knowledge and skills as a sole trader in your area of expertise, delivering the best possible service to your customers, you may invest in training courses throughout the tax year.
You will be pleased to know that training courses are deemed an allowable business expense by HMRC. The training courses must be relevant to your current profession and geared towards furthering your career. For example, if you are an electrician that needs to enrol in a refresher course to understand the latest regulations, this expenditure will be tax deductible.
If you are considering enrolling in a training course that will enable your business to enter an entirely new marketplace, this is not allowable.
As ever, if you are unsure whether a training course will be tax deductible for your self-employment, please don’t hesitate to ask us via telephone or email.
HMRC’s Simplified Expenses Calculator
If you opt to trade as a sole trader rather than a limited company, HMRC allows you to use their Simplified Expenses Calculator for some of your business costs.
This calculator enables sole traders and business partnerships to determine their business expenses using flat rates rather than working out the specific costs to your business. Flat rates can be used to cover:
- Business costs for vehicles
- Costs of working from home
- Cost of living in your business premises
The tool is by no means a detailed way of measuring business expenses. However, it can help you find out which way of calculating your business expenses will save you more money.
The Simplified Expenses Calculator is not available to limited liability partnerships or limited companies.
Don’t forget – if you are looking for an easier way to keep a record of your business expenses, saving hours of paperwork and administration week on week, check out our competitive pricing for Dext software.
This digitised expense scanning facility allows you to take photos of expense receipts using the Receipt Bank mobile app, so that you never miss a penny of potential relief to claim in your next self-assessment tax return.
If you wish to discuss any of our bookkeeping or tax planning services, feel free to arrange a free initial consultation with our friendly and experienced team today on 01282 864 228 or drop us a line using our online enquiry form.
Date published 15 Jul 2020 | Last updated 09 Jun 2021This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.