Freelancer expenses: A simple guide

Your expenses are purchases made related to your business such as office equipment, office rent and business travel costs, extra costs incurred by working from home. It is important to correctly calculate your expenses and deduct them to work out what profit you are making, as this affects how much tax you will be required to pay.

Now that most of us are spending more time working from home, and with the cost of living rising, you may be pleasantly surprised that there are extra business expenses you could be eligible to claim back.

What expenses can I claim for while I’m working from home?

Working from home enables you to claim for certain expenses including:

• Rent or mortgage interest
• Council tax
• Heating
• Electricity
• Water rates
• Property insurance
• Internet or telephone/ mobile phone use
• Security
• Repairs and maintenance of business premises. (1)

For amenities such as electricity and internet that you use for both business and personal use, you can claim allowable expenses for the business cost. That means you can expense a proportion of the cost, not the whole cost of a bill. To do this you need to work out what percentage of the bill is attributable towards the running of your business.

As an example¹, if your house has five rooms with an annual electricity bill of £500 a year, and you use one of these rooms as an office, you can expense a proportion of the bill to compensate for the electricity used in your office – £500 divided by five rooms, equals £100 a year.

If you work two days a week from home, you can claim back £28.57 a year – £100 divided by 3.5.

Another example would be your mobile phone bill, and many people run their whole business via their mobile phone. If your monthly bill is £50 and 30% of your phone usage is making business calls, then you could claim £15 of your bill as a business expense.

[1] Please note that these examples are purely illustrative, please ensure you review the relevant government websites.

HMRC trust your judgement in calculating the proportion of bills that can account for business expenses. It’s still important to be accurate and vigilant, in case you are investigated by HMRC and need to explain your calculations.

Office equipment and property

As well as claiming for bills, you can claim business expenses on office equipment and property. This includes:

• Stationery
• Postage
• Printing
• Printer ink cartridges
• Computer software your business uses for less than 2 years 

Travel expenses

If you are travelling, you can claim expenses on the following:

• Vehicle insurance
• Repairs and servicing
• Fuel
• Parking
• Hire charges
• Vehicle licence fees
• Breakdown cover
• Train, bus, air and taxi fares
• Hotel rooms
• Meals on overnight business trips

You are unable to claim expenses for travel between home and work. Fines incurred are also not covered under travel expenses. 

Staff expenses

When it comes to individual staff members themselves, you can claim business expenses for the following:

• Employee and staff salaries
• Bonuses
• Pensions
• Benefits
• Agency fees
• Subcontractors
• Employer’s National Insurance
• Training courses that help to improve the skills and knowledge of your business

Self-employed individuals are unable to claim staff expenses for amenities such as childcare or housekeeping. When claiming expenses for training courses, the courses must be related to your business.

Training courses claimed for cannot be for the purpose of starting a new business or for the purpose of expanding into new areas of business.

Legal or financial expenses

As a freelancer, you can claim business expenses on the costs you pay in hiring an accountant or paying for the services of a solicitor. If you have employed the services of a surveyor or architect for your business, these costs can be claimed too.

For those with Professional Indemnity Insurance, Public Liability Insurance or any other type of business insurance policy, you can claim expenses for the cost of your insurance premiums.

Professional Indemnity insurance is vital to freelancers and contractors, in protecting their business and providing security and peace of mid. If you make a mistake in work for a client or provide advice that results in a financial loss for them, Professional Indemnity insurance will cover you if your client makes a claim against you. Legal costs and expenses incurred in your defence or compensation awards to the client will be covered by this policy.

Public Liability Insurance covers you for claims made by members of the public, for injury or damage. This can include customers, clients, suppliers or even passers-by.

As with Professional Indemnity Insurance, Public Liability insurance will cover costs of your legal defence and compensation awards. It can also cover medical costs and loss of income, resulting from the claim.

Other financial costs you can claim expenses for include:

• Bank, overdraft and credit card charges
• Interest on bank and business loans
• Hire purchase interest
• Leasing payments

As a self-employed individual, you are not eligible to claim for payments including overdrafts and repayment loans or debts not included in your turnover. 

Marketing expenses

Marketing is important for many businesses and is often costly. If you are advertising in printed materials like newspaper or directories, you can claim allowable business expenses. You can also claim for the costs of maintaining your website, free samples and for email marketing.

Entertainment expenses

Business expenses cannot be claimed for entertaining clients, customers or suppliers or for events.

Expenses for memberships and subscriptions

If you, like many other freelancers, pay to be a member of a professional organisation related to your industry or pay for a trade journal subscription, you can claim those expenses.

Subscriptions including gym memberships and charity donations cannot be claimed against.

Clothing expenses

Self-employed workers are unable to claim expenses for everyday wear, even if you need to equip yourself with smart office attire for meeting up with clients.

The only time you can claim expenses for your clothing, is if you wear a uniform or protective clothing. Self-employed actors and entertainers can claim expenses for costumes.

Simplified expenses for sole traders

Rather than working out your business costs, simplified expenses allow you to claim back some of your expenses using flat rates, set by HMRC.

This method of calculating business expenses can be used by both sole traders and business partnerships, which have no companies as partners. Simplified expenses cannot be used if you operate a limited company.

You can use these flat rates for expenses covering:

• Business costs for vehicles
• Working from home
• Living in your business premises

To use simplified expenses, you need to keep a record of the hours you work from home and provide information on how many other individuals live at your business premises over the year. If you use a car or other vehicle to run your business, you need to record your business miles to claim on this.

At the end of the tax year when submitting your self-assessment tax return, you will need to add up all these expenses using the flat rates.

Sole traders working from home

When you are calculating your working from home expenses using the below flat rates, bear in mind that telephone and internet expenses are excluded. For these, you will need to calculate the actual business cost.

To claim using simplified expenses, you must work 25 hours or more from home.

Hours of business use per month	Flat rate per month
25   to 50	45p
51   to 100	25p
101   and more	24p

Rates as of 12.04.2022 (2)

Vehicles

If you are a sole trader using a vehicle to travel for work, you can calculate flat rates for your mileage, rather than working out the actual costs of buying and running your vehicle.

Note that, if you have already claimed capital allowances for your vehicle, you are unable to claim simplified expenses for the same vehicle.

If you do use flat rates for your vehicle, HMRC do specify that you must carry on using flat rates for as long as you use your vehicle for business.

As well as using flat rates for your mileage, you can still claim for other travel expenses, like parking or train journeys. 

If you’re unsure of whether using simplified expenses or working out the actual cost is a better option for you, try using HMRC’s simplified expenses checker.

 

Vehicles	Flat rate per mile
Cars   and goods vehicles first 10,000 miles	45p
Cars   and goods vehicles after 10,000 miles	25p
Motorcycles	24p

Rates as of 12.04.2022 (3)

Limited companies working from home

If you run a limited company and work from home, you can calculate your home office expenses using HMRC’s allowance guidelines for the extra costs of running your business from home.

Through your limited company, you can claim up to £6 a week as an allowable expense along with the other expenses you will be claiming for. Receipts as proof are not needed to do this.

If you think your costs are going to be a lot more than this, you can calculate the actual proportionate cost, used by your business. If you are choosing this method, make sure your calculations are fair and honest.

The alternate option for limited companies is to rent your home office to your business. This option can in some cases mean claiming more money. To do this, you must have a rental agreement in place between you as the homeowner and your limited company, signed by both parties. You also need to ensure that the rental price set is fair to both you as the homeowner and the limited company.

Making a claim and keeping track of your expenses

When it comes to processing your claims, it is important to have a record of all your business expenses for that tax year. This will provide proof of your costs, should they need to be justified.

You can keep on top of your expenses, by recording them in a spreadsheet as you go along or by using a simple app like Quickbooks.

When you submit your tax return, you will not be asked to attach proof of your expenses. It is still crucial that you keep proof of records and receipts, in case HMRC do contact you. You will need to keep these expense receipts for six years. HMRC can choose to investigate claims made up to six years prior.

If keeping paper copies of all your receipts over a six-year period becomes too much paperwork, you can always scan your receipts or take photos of them as evidence. Make sure you have a back-up copy of these files to safeguard you against any technology glitches.

Once you have a record of all your allowable expenses for that tax year to hand, you’ll need to add up these figures and calculate the total cost on your Self Assessment tax return.

Legal Expenses insurance

In circumstances where your taxes may be subject of a HMRC investigation, holding Legal Expenses insurance can cover you from having to pay for legal representation out of your own pocket. You can find out more about Legal Expenses insurance here.

 

Sources

1. https://www.gov.uk/tax-relief-for-employees/working-at-home

2. https://www.gov.uk/simpler-income-tax-simplified-expenses/print

3. https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home

https://www.gov.uk/self-assessment-tax-returns

https://www.gov.uk/simplified-expenses-checker

 

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