What business expenses can self-employed people claim?

Self-employment can mean avoiding the long commute and enjoying the freedom of being your own boss. Plus, you might have heard about tax-deductible expenses. Business owners might tell you to keep receipts, claim client entertainment costs, or deduct part of your rent or mortgage if you work from home.

But is all of this true? Let’s separate myth from fact to help you submit your tax return with confidence.

How do self-employed expenses work? 

Self-employment means you are responsible for your own tax affairs. Each year, you submit a tax return to HMRC that details your profits and losses. HMRC then calculates the tax you owe.

However, working for yourself isn't free. You will likely incur various costs, such as energy bills, travel expenses, clothing, or marketing, which all reduce your profits. For example, if you're a carpenter who sells a handmade table for £500, but the raw materials and machinery costs total £200, your profit on the table is actually £300.

It wouldn’t be fair to pay tax on profits you haven’t actually made. So, you can deduct your business costs from your profits, which reduces the tax you owe.

To help with this, HMRC lets you enter a sum for expenses on your tax return. You don’t need to provide evidence of your expenses when you submit the return, but you should keep proof in case HMRC asks for it.

What expenses can I claim when working from home? 

Many self-employed people work from home, but does that mean you can claim the full cost of your utility bills, rent or mortgage payments, Council Tax, and internet? Not entirely.

Before we get into the specifics, here’s a list of things you may be able to claim a proportion of the cost of:

• Heating

• Electricity

• Insurance 

• Council Tax

• Mortgage interest or rent

• Internet and telephone 

However, you can’t deduct the full cost of each bill in your self-employed tax return as the costs don’t relate solely to your work.

You need to estimate a reasonable proportion of each bill that applies to your work. One way to do this is by calculating the square footage of your home and the space within it which you use for work. Some bills are easier to split - for example, you can easily track the work-related calls versus personal calls. Others might be more tricky and may require some help from an accountant or financial adviser. 

You can see some helpful examples and ways to simplify expenses on the government website. 

What else can I claim back on tax? 

Other HMRC allowable expenses you can apply for include pretty much any costs you incur to do your work. This may include:

• Travel costs - such as train tickets or parking fees

• Clothing expenses - such as uniforms or PPE

• Staff costs - such as salaries or training courses

• Office costs - such as stationary, furniture or the bills if you have your own office

• Raw materials that you need to craft and sell on

• Insurance, bank charges and loan interest 

• Advertising and marketing, including website costs

In addition to these allowable expenses, you can also claim back the costs of larger items like vehicles, computer equipment or machinery. This is either cash basis expenses or capital allowances. 

Small businesses and the self-employed can use cash basis expenses. It involves reporting your income and expenses for the year using traditional accounting. Larger businesses with higher incomes use capital allowances - but not exclusively. 

How can I track my expenses? 

Tracking expenses is easier these days with software and apps, but you can still keep folders of receipts and invoices if you prefer. Either way it’s a good idea to organise your expenses into different categories - bills, travel, clothing etc. This helps you keep track of your expenses, and also helps HMRC if they do ask you to produce financial statements to back up your tax return, which can most certainly happen. 

However you decide to track your expenses, make sure you set time aside to do it regularly. It can be a big job if you leave it until the end of the year, and you can make mistakes.

If you want to take advantage of some apps or software, consider platforms like Xero or Quickbooks. Both are easy-to-use tools for tracking expenses and income. They sync with your bank account, allow you to categorise expenses easily and are available on iOS, Android and web.

And with many more self-employed earners becoming obliged to follow Making Tax Digital (MTD) rules, digital record keeping is all the more important.

How does HMRC determine if I’m self-employed? 

An individual is considered self-employed if they run the business and bear responsibility for its success or failure, according to HMRC.

If you’re still unsure, consider your work activities: 

• Do you carry out your work independently? 

• Do you invoice? 

If the answer is yes, then you’re probably self-employed. 

Notify HMRC as soon as you decide to switch to self-employment, even if you mix employment and self-employment. This allows HMRC to adjust your tax code accordingly and know to expect a tax return.

Keep in mind the deadlines. If you haven’t registered or submitted a self-assessment tax return before you must let HMRC know by a specific date. In 2024, the date was October 5. Once you register, HMRC will provide you with your Unique Taxpayer Reference (UTR). This reference number identifies you when you submit the tax return or if you need to contact HMRC to discuss your self-employed taxes.