What expenses can I claim as a freelancer?
Have you made any phone calls for your freelance business? Or paid for an email account? Or travelled by train or car to a client meeting? If you answered yes to any of these questions, chances are you’ve got some eligible business expenses. And including business expenses on your tax return can lead to a lower tax bill, which makes them definitely worth knowing about.
How do business expenses work?
Business expenses are day-to-day costs you have to pay in order to run your freelance business. HMRC recognises that these costs are necessary for your business and lets you subtract them off your freelance income before your income tax is calculated. Depending on how much money you’ve earned, this can mean that you end up with a lower tax bill.
For example, imagine you bring in £40,000 from your freelance work. If you had to pay the 20% base tax rate on this full £40,000, your tax bill would be £8,000. Now imagine you have spent £7,000 over the year on essential items for your business. Rather than paying 20% of the full £40,000, you only need to pay the 20% tax on £33,000 (the original £40,000 minus the £7,000 of business expenses). This gives you a tax bill of £6,600 – a welcome £1,200 reduction.
What counts as a business expense?
The UK government website has a detailed list of expenses if you’re self-employed. However, broadly speaking, you can include the cost for any relevant business items as long as they are necessary for the day-to-day running of your business and you only use them for that purpose. This might include:
Office costs, such as stationery or phone bills
Travel costs, such as fuel, parking, train or bus fares – but NOT including costs from your home to place of work
Staff costs, such as any costs for sub-contracting work or paying someone else to deliver work for your business
Things you buy to sell on, such as stock or raw materials
Financial costs, such as insurance or bank charges
Business premises costs, such as heating and lighting
Advertising & marketing, such as website costs
Training, as long as it’s related directly to your business.
One point to bear in mind is that business expenses are normally for day-to-day running costs. If you buy an item that is likely to last for two or more years, such as a laptop or a car, you can still include it on your tax return but it’s likely to be classified as a capital allowance which effectively splits the amount you can claim over a longer period.
What happens if I use something for both personal and business use?
In an ideal world (well, ideal for sorting taxes anyway), items you use for your business and items you use in your personal life would be completely separate. In reality, there is some crossover. For example, you might have a mobile phone that you use both for your work and personal life or, if you work from home, the bills you pay for your internet and your electricity may cover both work and personal use.
The good news is that, while you can’t claim for the full cost of the item, you are allowed to include the proportion you use for your work as part of your business expenses. There is not a set formula for how you work this out. Instead, HMRC expects you to use ‘a reasonable method’. This doesn’t need to be a super-complicated calculation – as long as you use a sensible and consistent approach you should be fine.
For example, say your mobile phone bill is £30 per month and you use it for about one third of the time for work. You might therefore decide it’s reasonable to claim £10 per month as a business expense (1/3 x £30 = £10). Or say you work from home and have monthly utility bills of £100 for your house. If you’ve got five rooms in total and use one of them every day solely for work, you might decide it’s reasonable to claim £20 (1/5 x £100) as a business expense.
Record keeping
One thing that’s really important is that you keep clear records of your business expenses, as HMRC can charge you a penalty if you can’t produce accurate records at any point up to five years after the tax return deadline. Your records should include:
Details of each item, including the date you bought it and what it was for
Receipts for each item
Bank statements, showing the costs going out.
This doesn’t mean you need to invest in super-expensive accountancy software however (although a sturdy filing cabinet might be useful). An Excel spreadsheet and a folder of receipts for each tax year works fine.
Want to know more?
Download our How to Set Up as a Sole Trader guide from the resources section for more practical information and tips.
Disclaimer: The information in this article was correct to the best of my knowledge at the time of writing but in no way should be regarded as official tax advice. If you’re unsure if an item counts as an eligible business expense, contact the HMRC self-assessment helpline.
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