It's almost tax time…again. Don't miss these tax-deductible business expenses that can help you maximise your tax deductions.
What’s the most confusing and stressful part of running a business for small business owners and sole traders? Ask a handful of freelancers that question, and there’s a good chance dealing with self-employment tax, knowing which tax credits count toward tax deductions, and how they can boost their tax refund with any available tax credit is top of their list.
The tax system and filing a self-assessment tax return can feel complicated. And sometimes, getting help from HMRC about your own income tax and expenses can take a long time.
Despite these headaches, it’s important to understand each tax credit and keep track of expenses you can use to lower the taxable income of your own business and reduce the amount of income tax you owe.
Here are some commonly overlooked tax deductions for freelancers and how not to miss them when you file your self-employment tax return in January.
Table of Contents
1. Office Supplies
You don’t need to look any further than your desk to find business expenses you can claim on your tax return. HMRC lets you claim tax relief based on items including your:
- Postage costs
- Printing costs
- Laptop or desktop computer
- Computer software you have used for under 2 years
- Computer software you pay to renew a licence for
For each of these items, you can only claim tax relief if they’re used solely for business purposes, or for the time they’re used for this.
So, if your annual phone bill is £200 and £70 of this is for business use, you can only claim tax relief for £70.
2. Mortgage and Utility Bills
You can claim tax relief for a percentage of your gas, electric, water, internet, and phone bills if you’re working from home. This percentage must be the equivalent of time or money spent using these for work purposes. The same applies to your rent or mortgage payments.
So, if there are 4 rooms in your house and you use 1 of them as a workspace, and your total electric bill is £400, you can claim tax relief for £100.
If you sell your home, Capital Gains Tax will apply to any part of your home that’s used solely for business. So it’s best not to use any room exclusively for work.
People always wonder about mortgage interest, so here’s the deal. You can claim 20% of your annual bills as Self Assessment expenses on your tax return, right? Well, the same rules apply to your mortgage interest (but not capital repayments) or annual rent costs.
3. Council Tax
Another great way to save money on your tax bill is by claiming tax relief for a percentage of your council tax bill. This can only be for the space in your property you use for work purposes. If your workspace makes up 25% of your property, you can only claim tax relief for 25% of your council tax bill on your tax return.
4. Marketing Costs
You can claim the cost of marketing your business on your tax return. This includes:
- Direct mail
- Free sample production and distribution
- Website hosting and maintenance
Remember, you can’t claim a tax deduction for the cost of entertaining clients or for hospitality expenses.
5. Simplified Expenses
Simplified expenses are one of the easiest things you can claim on your tax return and deduct from your self-employment tax bill. HMRC lets you make a flat-rate deduction if you’re a sole trader or part of a partnership, and you work from home for at least 25 hours a month.
Deductions amount to £10 per month if you work 25 to 50 hours a month, £18 per month if you work 51 to 100 hours a month, and £26 per month when you work from home for a minimum of 101 hours a month. This results in an annual £312 you can include in your self-assessment. This rate doesn’t include phone or internet expenses, which you must claim separately.
However, you may find you still miss out on the chance to deduct more costs from your total income tax. HMRC’s online expenses tool can help you decide if it’s better to claim simplified expenses or work out the total cost of working from home.
6. Mileage Costs
You can claim mileage allowance for any travelling you do for business purposes on your tax return. If you drive a car or van, you can claim 45p for every mile you travel up to 10,000 miles off of your income tax. And you can claim 25p for every mile after that.
So, if you drove 12,000 miles for work during the tax year, you can claim £4,500 for the first 10,000 miles, and £500 for the next 2,000 miles.
You can claim for driving a motorcycle too, but the rate is slightly less at 24p per mile when using simplified expenses.
Other itemised deductions you can also claim for during the tax year include:
- Vehicle insurance
- Repairs and servicing
- Licence fees
- Breakdown cover
- Public transport, plane, and taxi fares
- Hotel rooms
- Meals during overnight business trips
However, you can’t claim for non-business travel, commuting between home and your workplace, and travel fines on your tax return.
7. Legal and Financial Costs
You can claim for any initial cost and ongoing cost that comes with hiring an accountant, financial adviser, solicitor, surveyor, or any other professional that’s helping you. Claim any of these on your tax return to lower the amount of income tax you pay.
You can also claim for:
- Professional indemnity insurance
- Bank, overdraft, and credit card charges
- Bank and business loan interest
- Hire purchase interest
- Lease payments
- Alternative finance payments
You can only claim for up to £500 in interest and bank charges if you use cash-basis accounting. And you can’t claim for any legal fees tied to buying property or machinery, but you can claim for them as capital allowances if you use traditional accounting.
If you’ve broken the law, you can’t claim any legal fees or financial costs associated with this on your tax return.
8. Unpaid Invoices
A beneficial and often unclaimed tax return expense is unpaid invoices. When you use traditional accounting, HMRC will allow you to claim for any amount of income you’re owed but aren’t planning to receive on your tax bill. It’s known as bad debt, and you must be sure that you’ll never get paid for these invoices.
However, you can’t claim for any unpaid money that’s:
- Not included in your turnover
- Related to the disposal of fixed assets
- Not calculated correctly
And you can’t claim for bad debts if you’re using cash basis accounting, as you’ve not received the money from your debtors. Cash basis accounting only records the income you’ve received.
While you can’t claim your whole wardrobe on your tax return, you can list certain items of clothing as business expenses, such as:
- Work uniforms
- Protective clothes
- Entertainment costumes
10. Staff Costs
Do you employ permanent members of staff, seasonal workers, or contractors? And do they help you run your business? Then you can claim for expenses associated with them, such as:
- Pension contributions
- Agency fees
- Subcontracting fees
- Employer’s National Insurance
- Business training
However, you can’t claim for nanny or childminder costs on your tax return.
If you’re subscribed to any professional bodies or trade publications that help you do your job, you can claim these subscriptions as tax deductions on your tax return. This also includes subscriptions to professional and relevant academic journals and memberships of professional organisations and unions.
You can’t claim tax deductions for political party payments or personal subscriptions, like hobby and lifestyle magazines and gym memberships.
12. Charity Donations
Any donation you make to a registered charity or community amateur sports club (CASC) is tax-free. It’s called tax relief, and how this works depends on how you’ve donated your funds.
You normally make donations through:
- Gift Aid
- Your wages or pension contributions
- Any land, property, or shares you own
- Your will
So, if you donated £1,000 to charity last year and pay the higher rate of tax, you can claim £250 on your self-assessment tax return.
Sole traders and partnerships can follow charitable tax relief rules as long as you don’t make a donation on behalf of a limited company.
Ready to Lower Your Tax Bill?
Dealing with taxes is a necessary cost of doing business. But paying too much tax doesn’t have to be. Make sure you’re aware of any business expense you can deduct from your total tax bill and keep records of those expenses, no matter their size. They all contribute to reducing the amount of tax you owe and increasing your business income.
Using accounting software like FreshBooks to track all of your itemised deductions year-round can help you stay organized and make tax time much easier. There’s no need to repeat the frustrations of previous tax years.
Your expenses can change each tax year, so it might be a good idea to work with an accountant or tax adviser or keep yourself up-to-date on any significant changes and get tax advice. They’ll help you find the best way to complete your tax return, pay tax, and keep hold of your own money. For these reasons, their professional fees are worth it.
Also remember that expenses aren’t the same as an income tax credit, which can also lower your tax bill. Be sure to research which ones apply to you and your business before you pay tax.
This post was updated in January 2024.