🎧 Listen Now: Sidehustles.co.uk One-Minute Podcast: How To Claim Business Expenses To Save Tax.
Many individuals new to self-employment and managing their own tax affairs may not be fully aware of the concept of allowable expenses. There is indeed a method to claim business expenses, which could significantly reduce your total tax bill. Understanding this process is critical for self-employed persons aiming to maximise their tax savings.
We have put together a detailed guide on claiming business expenses. Keep reading to uncover vital insights that you can apply to your forthcoming tax returns.
According to HM Revenue and Customs (HMRC), business expenses encompass all operational costs incurred in the running of your business. Tracking these expenses is crucial not only for understanding your profit margins but also for tax purposes.
When we refer to 'claiming' expenses, some may assume it means receiving a payout. In reality, to claim expenses is to claim tax relief. These business expenses are deducted from your gross income, thereby reducing your taxable income.
For instance, if you charge a client £100 for a service and incur £10 in expenses to provide it, that £10 is your business expense. This leaves you with a profit of £90. You're taxed on the £90, not the full £100.
For those in the Basic Tax Rate bracket, this could mean a saving of £2.
For example:
Though modest at first glance, such savings accumulate significantly over time.
Not all business expenses can be claimed for tax purposes, unfortunately. Navigating the allowable expenses can be quite complex. HMRC provides a resource for calculating taxable profits for Self Assessment, which includes a detailed table of typical business expenses. Some of the allowable expenses are:
Some expenses may be partially deductible when used for both personal and business purposes, such as a home office or mobile phone. In these cases, you can only claim the portion of the expense that relates to your business operations.
Additionally, it's important to understand capital allowances, which allow you to deduct the cost of certain business assets from your profits over time. These assets typically have a longer life, such as equipment, machinery, or business vehicles.
Navigating through the maze of what is and isn't allowable can be challenging. For areas that tread the line between personal and business use, or for more complex deductions like capital allowances, seeking professional advice from a
Chartered Accountant
can ensure you are making the correct claims on your tax return.
As highlighted earlier, it’s vital to discern which expenses are strictly business-related to qualify as deductibles for tax purposes. Here are some common expenditures that are not eligible for tax relief:
It’s crucial to correctly identify and separate non-allowable expenses, such as personal or capital expenditures, from those that are allowable to ensure accurate tax filings and to avoid issues with tax relief claims.
With an understanding of which expenses are tax-deductible, you can now determine how much you could potentially reduce your taxable income. Accurate and up-to-date bookkeeping is essential for this task, as it should provide a comprehensive record of your business expenses.
Should there be any uncertainty regarding the eligibility of an expense, consulting with a Chartered Accountant is advisable. They are skilled in identifying which expenses are permissible deductions.
Armed with a comprehensive and accurate list of business expenses, supported by your financial records, you may begin to claim these on your tax return. Carefully input the allowable amounts into the appropriate fields of your tax return form prior to submission and payment.
It is worth noting that whilst HMRC does not typically request immediate evidence for the expenses claimed, this does not provide a licence to submit inaccurate figures. HMRC reserves the right to audit your claims and can request substantiation. Should any discrepancies be uncovered, you may find your claims disallowed and could potentially face legal ramifications.
The digital era has transformed how we handle expense tracking, with innovative tools such as Dext, and in-built features in accounting software like Xero and QuickBooks that simplify the process. Here’s how you can use these tools to streamline your expense management:
No more filing cabinets filled with paper receipts. With the receipt snapping tools available in Xero and QuickBooks, simply photograph your receipt and the details will be digitally recorded. Dext offers a similar feature, allowing for immediate data capture and categorisation.
These platforms store your receipt information securely in the cloud. You gain the flexibility to access your expense records from any location, safe in the knowledge that your data is protected from physical damage or loss.
Both Xero and QuickBooks offer seamless integration with receipt snapping tools, ensuring that your financial records are automatically updated, minimising the need for manual data entry and the associated risk of errors.
By accurately recording every expense as it occurs, these digital solutions help you claim the maximum amount of tax deductions available to you, potentially lowering your taxable income.
In the rare case that HMRC requests proof of your expenses, having them stored and organised digitally means you can respond promptly and confidently.
Embracing these digital tools not only saves you time on routine administrative tasks but also provides peace of mind that your business finances are orderly and HMRC-compliant.
Maintaining accurate records of all your business expenses can be demanding. Fortunately, the Simplified Expenses scheme offers a more straightforward approach. It allows sole traders and self-employed individuals to use flat rates rather than detailed itemisation for certain expenses. Due to its specific conditions, it's advisable to consult with your accountant to determine if Simplified Expenses is advantageous for your circumstances.
As a sole trader, you are not required to register with HMRC if your income is below £1,000 per year, thanks to the trading allowance. However, should you choose to register, this allowance can be used to lower your overall income tax.
It's important to note that you cannot combine the trading allowance with tax relief on business expenses; you must choose one. To decide which is more beneficial, compare the tax savings from both options and select the one that yields the greater financial advantage.
Understanding how to claim business expenses can lead to considerable tax savings for self-employed individuals and sole traders. This guide offers a foundational understanding of qualifying expenses and the calculation process. For a more detailed exploration or personalised advice, contact a qualified Chartered Accountant.
Navigating business expenses is just the beginning of your fiscal journey as a self-employed individual. But there's more to explore, especially when it comes to the nuanced world of side hustles and their tax implications. Consider this the foundation; our next guide, 'SIDE HUSTLES AND YOUR TAX OBLIGATIONS,' is designed to help you understand the full scope of your tax duties. Ensuring you're well-informed is crucial, much like ensuring a proper seal on a swimmer's goggles. Delve into our comprehensive guide next, and secure your financial affairs with the same confidence as your business ventures.
🎧 Listen Now: Sidehustles.co.uk One-Minute Podcast
How To Claim Business Expenses To Save Tax.
Welcome to the Sidehustles.co.uk One Minute Podcast. In the next 60 seconds, we're sharing a real-world insight from our network of seasoned side hustlers. This quick tip is designed to offer you practical advice that you can apply immediately in your side hustle journey.
Today, we're talking about how to claim business expenses to save tax. In the busy world of self-employment, managing your expenses can be as simple as snapping a photo. Tools like Dext or AutoEntry transform the way you handle receipts, eliminating piles of paperwork. Instead of filing away paper receipts, you take a photo with your phone, and the software stores it securely in the cloud. This method not only ensures that your records are up-to-date and easily accessible come tax time but also makes it effortless to claim every allowable expense. By keeping digital track of your expenses, you're not just organising your finances; you're potentially lowering your tax bill as these deductions add up through the year. So, embrace the digital solution, and make expense management a breeze.
That's your one-minute real-world insight. Stay tuned for more!
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