Sole Trader Expenses Explained: A Comprehensive Guide

If you’ve been hoping to find a blog with sole trader expenses explained in great detail – you’re in luck! We’ve written one!

Sole traders in the UK incur a variety of business expenses, and the good news is that many of these can be claimed against their tax bill. From basic office costs like stationary and phone bills to travel costs and training courses, there could be a number of expenses you’ve incurred that can reduce your tax bill and maximise your income. 

In this article, we’ll delve into the nitty-gritty of what constitutes an allowable expense, how to distinguish between personal and business use, and how to make the most of working from home allowances. We’ll also explore the concept of ‘wholly and exclusively’ in relation to business costs, and how to claim back expenses in a way that is compliant with HMRC guidelines.

Sole Trader Expenses Explained

Sole trader expenses are a critical aspect of running a business as a self-employed individual.

The primary objective of claiming these expenses is to reduce the taxable profit of the business, which in turn lowers the sole trader’s income tax liability. It’s a strategic move that can significantly impact the financial health of the business.

But not all expenses can be claimed. Personal expenses or costs that serve a dual purpose (both personal and business use) are not considered allowable. This distinction between allowable and disallowable expenses is crucial to avoid potential penalties and submit accurate tax returns.

Types of Sole Trader Expenses You Can Claim

A tax deduction or deductible  is an expense that you can subtract from your taxable income. This lowers the amount of income that the government taxes you on, ultimately reducing your tax bill. Tax deductible expenses include:

• Office Supplies: These are items like stationery, printer ink, and computer software. They’re essential for the day-to-day running of your business.
• Travel and Transportation: If you’re travelling for business purposes, you can claim these costs. This includes fuel, train tickets, and even airfare.
• Home Office Expenses: If you work from home, you can claim a portion of your home expenses. This could include rent, utilities, and internet charges.
• Equipment, Tools, and Supplies: If you need to purchase equipment or tools for your business, these costs can be claimed. This might include machinery, tools, or even a work vehicle.
• Professional Services: This covers the cost of hiring professionals like accountants or lawyers. Their fees can be claimed as a business expense.
• Marketing and Advertising: Costs associated with promoting your business, such as advertising campaigns or website maintenance, can be claimed.
• Insurance: If you have any insurance policies related to your business, you can claim these costs.
• Record-Keeping and Expense Tracking: Any costs associated with keeping track of your business finances can be claimed. This might include accounting software or hiring a bookkeeper.

Bear in mind that not all your expenses are claimable or allowable.

Criteria for Allowable Expenses

Understanding the criteria for allowable expenses is crucial for sole traders. These expenses must be directly related to your business operations. This means that any costs that serve a dual purpose are not considered allowable. For instance, if you purchase a laptop for your business but also use it for personal tasks, it may not qualify as an allowable expense. The expense must be incurred solely for the purpose of your business.

It’s important to note that allowable expenses must be backed by valid paperwork, like iinvoices or receipts that prove the expense was indeed for business purposes.

Claiming Business Expenses: Travel and Transportation

As a sole trader, business mileage is a key expense you can claim back. This covers the distance you travel for work purposes using your personal vehicle. The rates you can claim are set by HMRC and vary depending on the type of vehicle and the number of miles driven in a tax year.

For cars or vans, the rate is 45p per mile for the first 10,000 miles. Beyond this, the rate drops to 25p per mile. For those using motorcycles for business travel, the rate is a flat 24p per mile, regardless of the distance covered.

You can also claim back public transportation costs incurred during business trips. This includes expenses for train tickets, airfares, and other forms of public transport. These costs are considered allowable expenses, providing you have the necessary supporting documentation such as invoices or receipts.

These expenses can only be claimed if the travel was necessary for your work. This does not include commuting to and from your regular workplace. If a journey is for both personal and business reasons, it’s best to consult your accountant to help quantify the business cost.

Home Office Expenses for Sole Traders

Working from home has become a new norm for many sole traders. It’s essential to understand how to claim home office expenses correctly to maximise your tax savings. Whether you’re using a corner of your bedroom as a makeshift office or have a dedicated room for your business, there are two methods that can help you accurately calculate your home office expenses:

Proportional Expenses

The proportional expenses method is a practical approach for sole traders who work from home, allowing them to claim a portion of their home expenses as business costs. This method involves determining the specific area of your home used solely for business purposes, such as a dedicated office space.

The key is to ensure that the space is exclusively used for business during work hours, although it can be used for personal activities outside of these times. The proportion of total household expenses allocated to the business is based on the size of this space and the duration of its use.

Keeping meticulous records of the space used and the time spent working there is crucial. This, along with any supporting documentation, can help ensure accurate tax returns and compliance with tax laws.

Simplified Expenses Method

The Simplified Expenses Method is a godsend for sole traders who work from home. It’s a system that uses flat rates for home office expenses, making the entire process less complicated. Instead of keeping detailed records of every penny spent, you can claim a fixed amount each month based on the hours you work from home.

This method is only applicable for sole traders and business partnerships without any companies as partners. Limited companies or partnerships involving a limited company cannot use this method.

Claim Equipment, Tools, and Supplies Expenses

Sole traders can claim equipment, tools, and supplies expenses as tax deductions, but with some considerations. Firstly, the equipment, tools, and supplies must be wholly and exclusively for business purposes. Secondly, the way you claim the deduction depends on the cost of the item. For relatively inexpensive tools and supplies, you can claim the full cost in the year you purchased them. For more expensive equipment and machinery, you claim deductions through Capital Allowances. This spreads the deduction over several years instead of claiming the entire cost upfront.

Capital Allowances

Capital allowances offer tax relief for the cost of purchasing and maintaining long-lasting items used in the business. This includes machinery, vehicles, and office equipment. These items are not just expenses, but investments that contribute to the growth and efficiency of your business.

If you use cash basis accounting and buy a car for your business, you can claim this as a capital allowance. But all other items you buy and keep for your business should be claimed as allowable expenses in the normal way.

Maintenance and Repairs

Maintenance and repair costs are incurred to keep your equipment, tools, and supplies in optimal working condition. They can include regular servicing, replacement of worn-out parts, or even the complete overhaul of machinery.

Minor purchases, such as computer consumables and office stationery, are also part of maintenance and repair costs. Even though they might seem insignificant, these small expenses can add up over time.

Professional Services and Insurance Expenses

Even business professionals need other professionals! You can claim some professional fees paid back from your tax bill, including:

Accountancy and Legal Fees

Accounting software can be a game-changer for sole traders. It simplifies bookkeeping, payroll, VAT returns, and more. The cost of such software is also an allowable expense.

The key is that these services must be used purely for business reasons. If your accountant spends time working on your personal finances, that portion of their fee cannot be claimed.

Business Insurance

Business insurance provides a safety net, protecting your business from potential claims or lawsuits that could arise due to professional negligence or third-party injuries. As a sole trader, you can claim the cost of your business insurance as an allowable expense. This includes policies such as professional indemnity insurance and public liability insurance.

Remember, some professions require specific insurance types, such as public liability or professional indemnity insurance.

Marketing and Advertising Expenses

As a sole trader, you have to promote your business constantly to maintain a healthy pipeline of clients. Don’t hesitate to invest in your marketing strategy – you can claim the expenses back!

Online Advertising

Online advertising encompasses a variety of digital platforms, including social media, search engines, and websites. As a sole trader, you can claim expenses incurred on online advertising, including building and maintaining your business website, paid digital advertising, and marketing campaigns aimed at generating leads.

Print Materials

Print materials remain a vital part of a small business’s marketing strategy. The costs associated with designing, printing, and distributing promotional materials such as business cards and brochures are all claimable. The distribution of these materials to prospective clients or customers also falls under this category.

Credit Card Costs and Other Financial Charges

Credit card costs can be a significant part of running a business, especially for a sole trader. These costs can include business bank account charges, overdraft fees, and interest on business loans.

However, there’s a catch. These costs must be for accounts or cards in the name of the business. Personal loans, overdrafts, or finance arrangements are not claimable. The capital or loan amount repayments cannot be claimed, only the interest.

Wrapping Up: Navigating Sole Trader Business Expenses

As a sole trader, you can claim allowable expenses as long as you’re doing so within the guidelines set by HMRC. An allowable expense must be ‘wholly and exclusively’ for business use, and it needs to be backed by proof, including receipts.

A trained accountant can help you make the most of your business income (and to reduce your tax bill) by identifying and submitting allowable business expenses on your behalf. With our sole trader package of only £350, you’re guaranteed the best result. Secure your package today.