As a freelancer, sole trader, self-employed worker or an owner of a Limited company have you ever wondered how you can lower your tax bill?
The simplest way to reduce your tax bill is by claiming back businesses expenses. However in order to claim back your expenses, the expense must be a cost that was made solely for the running of your business and you must ensure that this is the case for any expenses you wish to claim.
How does a business expense reduce my tax bill?
An expense is not taxed so say for example, your income for a month was £8,000 and you withdrew it with no expenses you would pay tax on the full £8,000.
However if you had £3,000 of business expenses this month you would now only pay tax on £5,000. It doesn’t work exactly like this but expenses don’t have an effect on your PAYE salary, dividends or even flat rate scheme but this does give you a basic understanding of how expenses work and how they lower your tax bill.
Types of expenses you could claim
HM Revenue and Customs’ rules state that expenses can be claimed, providing they are ‘wholly and exclusively for the purposes of your business’.
The most common expenses that can be reclaimed purely for business purposes include:
- Company formation (if a limited company contractor)
- Accountancy fees
- Business travelling
- Business telephone calls
- Employers National Insurance contributions
- Computer software
- Use of home office
- Company bank charges and interest
- Books and magazines that are relevant to your business
- The rent, heating and lighting of your business premises
If you are Limited company contractor caught by the IR35 legislation, your accountant will be able to clarify this for you. As a result you can only claim for:
- Administration expenses which are fixed at 5% of your contract income
- Travel and accommodation expenses
- Pension contributions
- Certain professional subscriptions.
Valid expense or not?
- Meal Allowance – Only allowed if working away from your normal place of work, at a remote site, or when staying away from home overnight.
- Clothing – You are not able to claim for ordinary clothing that could be part of your every wardrobe, even if you wouldn’t wear these items outside of work.
- Training – This is a valid contractor expense, but only if it is a training course relevant to the performance of your duties.
- Accommodation – You can claim for the cost of a hotel or bed and breakfast for working away, there is no set allowance, however, the cost of accommodation and additional meals must be deemed as ‘reasonable’.
- Travel – You are able to claim the cost of travel to and from your temporary place of work, as well as parking and congestion charges. However, you cannot claim for either parking or speeding fines.
These are the best form of evidence if you should need to provide HMRC with proof of your expenses.
Your accountant does not need to see your receipts, but it’s a good idea to keep hold of them for a minimum of six years, as HMRC can go back as far as this, should they decide to investigate.
As you can see there are many different business expenses you may be entitled to claim back. Claiming expenses is pretty straightforward but as with anything to do with your business accounting it is recommended that you seek advice from your accountant.
About the Author: This article was written by Senior Product Manager, Luisa Lawrence on behalf of SJD Accountancy. For more information about the UK’s largest Contractor Accountants, please visit the site today.