What expenses can I claim as a self-employed business owner?

Freelancer going through their receipts and recording their business expenses.

As a small business owner, it’s imperative that you know how to track and record your business expenses and which expenses can be submitted as a genuine business expense and which cannot.

For many small business owners, tracking and recording genuine expenses claims can be a bit of a headache. This can be especially true of new business owners who have no previous experience of managing their accounts and expenses.

In our concise guide, we take a look into this often confusing aspect of running a small business. We explore what the term ‘expenses’ actually means, and explain why tracking is so important. Finally, we look at some of the ways small businesses can keep on top of their expenses.

What are business expenses?

Business expenses are costs directly associated with running a business. Expenses can include outgoings including employee salaries and work premises overheads, to the cost of small business insurance policies, and costs for work uniforms, marketing your business, and for some training costs.

As per HMRC rules, in the UK there are two categories of business expenses, tax-deductible and non-tax-deductible expenses.

Although all expenses must be tracked, the way they are recorded in a business account and the business’ tax returns will vary depending on which of the two categories they fall into.

What expenses can I claim if I’m self-employed?

Tax-deductible expenses – Typically, a business must spend money before it can make money.

A great deal of this expenditure can be submitted as a tax-deductible expense and offset against profits, which can result in a smaller tax liability.

In order to be a tax-deductible expense, costs must be essential in the running of a business. For example, if you run a delivery firm that requires a fleet of vans, you could claim the cost of purchasing the vehicles, the fuel, and the maintenance costs required to keep the vehicles roadworthy.

Common examples of what are allowable business expenses include:

  • office costs (e.g. broadband bills)
  • advertising and marketing costs
  • travel costs for work travel (e.g. petrol)
  • clothing expenses (e.g. uniforms, protective workwear)
  • salaries and the costs of hiring subcontractors
  • stock and raw materials for resale
  • financial costs such as bank charges and business insurance
  • heating and lighting your office 
  • rent on business premises and business rates 

Non-tax-deductible expenses - Some people confuse what can be claimed as an expense and what cannot. A disallowable non-tax-deductible expense cannot be deducted from a business’s profits, which means the expense still contributes toward a company’s annual tax bill.

Examples of non-tax-deductible expenses include:

  •  Income paid as dividends.
  • Client entertainment
  • Gifts to clients
  • Most legal fees
  • Fines
  • Donations made via Gift Aid
  • Depreciation of assets or improvements e.g. renovations to those assets.

Is business insurance tax-deductible?

Yes – most business insurance policies are classed as a tax-deductible expense. For example, professional indemnity insurance and public liability insurance are considered ‘allowable expenses’. This means the cost of these policies can be deducted when you calculate your taxable profits each year.

Why is it important to keep track of your business expenses?

There are three great reasons why keeping track of your business expenses is advantageous to your business:

You can pay less tax

You’re taxed on your business’ total income, minus all tax-deductible expenses. So, it pays to track and log your business expenses carefully so your business can keep a larger proportion of its profits.

It can make tax returns easier

Tax returns are important, and if your business submits its tax returns late, it can face financial penalties. By tracking your expenses as you go – rather than collating relevant bank statements and receipts at the last minute – you make the process of completing your tax return much less stressful. It can also help you justify your position to HMRC should they ever challenge your tax return.

It can give you a better idea of your business’ financial health

Maintaining up-to-date business accounts can give you a clearer picture of your business’ financial health. Different businesses experience different cash flows, from seasonal patterns, and periods of growth and of stagnation.

Staying in control gives you the most accurate view of your business’ performance, which allows you to make informed business decisions.

How do small businesses keep track of expenses?

Manual filing of receipts and keeping track of all expense claims in ledgers is considered outdated.

From April 2024, it will be a legal requirement for all UK businesses with an annual turnover above £10,000, but falling beneath the VAT threshold of £85,000, to keep digital accounts. This legislation is part of HMRC’s Making Tax Digital (MTD) initiative.

Accounting software is designed to make recording, archiving and analysing income and expenditure data simple. It can also reduce instances of human error, giving business owners and HMRC a more accurate picture of financial health of the business. Under MTD, the majority of small businesses will have to track their expenses in this way.

How you can protect your business with Legal Expenses Insurance

When you run your own business, there’s always the chance that you could be approached by HMRC for a tax investigation. HMRC are able to randomly select one out of every 1,000 tax returns each year for scrutiny. Therefore, it is pertinent to manage your expenses efficiently and consider protecting your business with legal expenses insurance.

Find out more about our Legal Expenses Insurance here or alternatively, click the Get A Quote button for a quick online quotation.

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