Tax breaks for freelancers: What you need to know
If you’re thinking about going freelance, Startups has compiled a tell-all guide on claiming tax relief for expenses
HMRC allows various deductions, reliefs and allowances that freelancers can use to reduce their tax bill.
Whatever your job, you’ll rack up costs as a result of running your business. When it comes to year end, your profits are your income less expenses, and you only get taxed on your profits, so the higher your expenses, the lower your tax bill.
These must be expenses that are valid for the running of your business.
You may be asked to provide evidence that you actually incurred the expenses and the expense was wholly necessary for your business if asked by HM Revenue & Customs, so don’t be tempted to fiddle the accounts to pay less tax.
You can deduct much of your business expenditure to work out your profits – but you can’t deduct private expenditure. You can also claim special reliefs for certain ‘capital expenditure’ – a one-off expenditure to buy or improve an asset you keep and use for your business, such as a new computer, phone or camera.
You can usually get deductions, reliefs and allowances for the current tax year and for the previous four years, although some have a shorter time limit for claiming.
Types of expenditure
Expenditure will usually fall into three different types. Each type has different rules for tax relief.
Expenditure on buying, creating or improving a business asset that you keep to earn the profits of your business is capital expenditure. So, the cost of buying a van for your business is capital expenditure but the cost of hiring it isn’t.
Other examples of capital expenditure include the cost of buying business premises, machinery, computers, fixtures and furniture.
You won’t be able to get tax relief for all types of capital expenditure.
And if you can, there are special rules for how you can claim it.
You can get tax relief for your business expenditure as long as it’s not:
- Capital expenditure
- Non-allowable, for example entertaining expenditure.
To be allowable expenditure, it must be exclusively for carrying on and earning the profits of your business. You can get some private benefit from the expenditure and still get tax relief for the amount spent for your business, as long as either:
- The private benefit was incidental
- You can identify and separate the expenditure between business and private purposes.
So, if you can separate car expenditure between business and private purposes, the business part is allowable. You can deduct the full amount of your allowable business expenditure from your business income to work out your taxable profits.
This is what you spend on your day-to-day living expenses, including the amounts you take from your business as a wage, or ‘drawings’. You can’t get tax relief for private expenditure.
Allowable and non-allowable business expenses
A business expense is allowable if it is wholly and exclusively for business purposes. The most common expenses that are normally allowable include:
- Administration costs
- Cost of stock
- Finance costs
- Motor and travel expenses
- Payroll costs
- Premises costs
- Professional fees repairs.
Key expenses, allowances and reliefs
The expenses, allowances and reliefs that you can get vary from business to business. The key ones are listed below, but specifics will depend on what you do for a living.
You can get capital allowances on the cost of:
- Fixtures and fittings: includes shelves, furniture, electrical and
- Plumbing fittings
- Plant and machinery: includes cars, vans, computers, equipment,
- Tools some buildings: includes industrial and agricultural buildings.
If you are self-employed, you must claim any capital allowances you are entitled to and wish to claim in your self-assessment Income Tax return. The claim must normally be made within 12 months after the 31 January fi ling deadline for the return. First-year allowances, some of which are also known as enhanced capital allowances, are currently available to businesses on the expenditure on certain items, such as energy-saving and water-efficient equipment, cars with very low carbon dioxide emissions, and goods vehicles with zero carbon emissions.
These allowances enable you to make a claim for up to 100% of the cost of the item against your business profits in the year of purchase.
You can deduct the cost of using your car for business purposes. There are two ways of working out how much you can deduct:
- A fixed rate for each mile travelled on business, using fixed
- Mileage rates (currently 45p a mile up to the first 10,000 miles and 25p per mile after that)
- The actual expenses, worked out using detailed records of
- Business and private mileage to apportion your recorded expenditure.
Expenses related to premises
You can deduct the costs of maintaining your business premises, including rent, rates, heat, light, repairs and insurance. You can also deduct the business part of these costs if you run your business from home.
You can deduct the administrative costs of running your business, including advertising stationery, postage, telephone and internet. You may also be able to deduct the cost of trade or professional journals or subscriptions.
What you can and can’t claim for
- Cost of goods bought for resale; cost of raw materials used; direct costs of producing goods sold; adjustments for opening and closing stock and work in progress; commissions payable; discounts given.
- Total payments made to subcontractors in the construction industry (before taking off any deductions). If you take on subcontractors in the construction industry (including work in a domestic environment, such as painting and decorating), then you probably need to register as a contractor in the Construction Industry Scheme.
- Salaries, wages, bonuses, pensions, benefits for staff or employees; agency fees, subcontracted labour costs; employer’s NICs etc.
- Car and van insurance, repairs, servicing, fuel, parking, hire charges, vehicle licence fees, motoring organisation membership; train, bus, air and taxi fares; hotel room costs and meals on overnight business trips.
- Rent for business premises, business and water rates, light, heat, power, property insurance, security; use of home as office (business proportion only).
- Repairs and maintenance of business premises and equipment; renewals of small tools and items of equipment.
- Phone and fax running costs; postage, stationery, printing and small office equipment costs; computer software.
- Advertising in newspapers, directories etc., mailshots, free samples, website costs. Interest on bank and other business loans; alternative finance payments.
- Bank, overdraft and credit card charges; hire purchase interest and leasing payments; alternative finance payments.
- Amounts included in turnover but unpaid and written off because they will not be recovered.
- Accountant’s, solicitor’s, surveyor’s, architect’s and other professional fees; professional indemnity insurance premiums.
- Trade or professional journals and subscriptions; other sundry business running expenses not included elsewhere; net VAT payments.
- Cost of goods or materials bought for private use; depreciation of equipment.
- Own wages and drawings, pension payments or NICs; payments made for non-business work.
- Non-business motoring costs (private use proportions); fines; costs of buying vehicles; lease rental expenses for cars with CO2 emissions over 160g/km (15% of the amount paid); travel costs between home and business; other meals.
- Costs of any non-business part of premises; costs of buying business premises.
- Repairs of non-business parts of premises or equipment; costs of improving or altering premises and equipment.
- Non-business or private use proportion of expenses; new phone, fax, computer hardware or other equipment costs.
- Entertaining clients, suppliers and customers; hospitality at events.
- Repayment of loans, overdrafts or finance arrangements; a proportion of interest and other charges where borrowing not used solely for the business.
- Debts not included in turnover; debts relating to fixed assets; general bad debts.
- Legal costs of buying property and large items of equipment; costs of settling tax disputes and fines for breaking the law.
- Depreciation of equipment, cars etc.; losses on sales of assets (minus any profits on sales).
- Payments to clubs, charities, political parties etc.; non-business part of any expenses; cost of ordinary clothing.
Tax relief if your business makes a loss
If your business makes a loss, you can get tax relief for it. You can do this by setting the loss against your:
- Other income for the same year or the previous year
- Gains for the same year or the previous year – if your other income is used up
Other income in the previous three years if your business started within the past four years profits from the business in later years profits for the business in the previous three years if your business has ceased.
If your business made a loss in the 2008/09 or 2009/10 tax years, you can set the loss against your profits for the business in the previous three years, whether or not your business has ceased.
Going Freelance, published by Crimson publishing, is available on Amazon now.