Business expenses for the self-employed

Businesses of all sizes, whether they are giant corporations or a single person working from their couch, need effective money management. Larger businesses typically have access to numerous financial resources, including internal staff to oversee their finances.

Those who are self-employed unfortunately don’t have the same resources. In fact, if you’re reading this, it’s probably because you’re self-employed and your own accountant.

One thing that many self-employed people need to manage is business expenses. If done correctly, managing your business expenses can help you save money and find more funds to reinvest back into your business.

So, what are business expenses and how can you make them work for you? Keep reading to find out more.

1. Business expenses explained
2. Allowable expenses – what can I claim back?
3. Business expenses vs. Personal expenses
4. Reinvest savings back into your business
5. Money insurance

Business expenses explained- an overview

Generally speaking, a business expense is a cost that an employee needs to pay to do their job. When you’re self-employed, you are your entire company, which means that you will incur these expenses to complete your work.

When you work for yourself, you can deduct some of these expenses from your profits without paying tax on them.

In short, reviewing and claiming your expenses could reduce your tax bill and free up profits that you can reallocate back into your business.

Allowable expenses – what can I claim back?

Allowable expenses are essential business costs that when approved, are deemed not taxable by the government. These are the expenses that you can deduct from your companies taxable profits.

Here is a very simple example:

Say you had an annual turnover of £20,000, and you spent £3000 on expenses. This means you would only pay tax on the leftover £17,000, not the full £20K.

So, if you’re self-employed, what can you claim back?

HRMC has clear guidelines as to what falls under the umbrella of allowable expenses. Here are some of the most common allowable expenses:

• Business Running Costs including utilities and rent: If you work from home, you need to calculate how much of these expenses are used for business and as part of your everyday living. The amount that this deemed business-related is what you will be able to deduct.
• Travel costs: You can claim back things like train fares, petrol, and parking costs should you need to travel for your work. Your commute doesn’t count as an expense.
• Office Supplies: These are items like stationery that you use exclusively for work purposes.
• Staffing costs: Wages, bonuses, pensions and other employee-related expenses fall under this category.
• Advertising and Marketing: If you’ve hesitated about spending money on marketing, this could be the push that you need. Expenses like building a website and advertising fall under this.
• Product components: Anything that you buy exclusively to sell falls into this category.
• Other expenses: You can claim back clothing costs like uniforms, legal costs, and financial costs such as insurance.

Business expenses vs. Personal expenses

When you’re self-employed or working as a sole trader, the lines between business and personal expenses tend to blur. This is a problem because you can’t claim back personal expenses.

Let’s use your utilities as an example, specifically, electricity. If you work from home, you will likely use electricity throughout the day. You will also use electricity outside of your working hours. Say you only work in one room for 8 hours of the day and this works out to be 25% of your monthly electricity bill of £60.

This means that you can only claim £15 off your electricity bill as an allowable expense. Unfortunately, it might not be as easy to calculate your engery usage.

Reinvest savings back into your business

Now that you see the areas where you might be able to save money, it’s time to discuss what you can do with these extra funds. Reinvesting is essential for your business, it allows you to grow your business and opens up new opportunities that may have previously been closed.

So, where should you reinvest these savings? Here are our top tips:

1. Marketing: This is our number one tip because marketing will allow you to generate more money for your business. You could use this money to run extra ads online, build a website, or create some new marketing material.
2. Upgrades: Is your computer getting a bit old or your work chair getting a bit worse for wear? Why not use these extra funds to upgrade equipment. Newer and better equipment will allow you to work more effectively, which can only mean good things for your business.
3. New Toys: If you’re not looking to upgrade your kit, you could always get that new shiny item that you’ve had your eye on. This could be anything from new tools that you can use onsite, a printer for essential documents, or additional utensils to use as part of your cooking.
4. More People: Perhaps you’re spread a little thin? Why not use the extra funds to get the help you desperately need? If you can’t afford to hire a person full-time, you could always take on a contractor, freelancer, or even a virtual assistant. If you’re in a position to take on a member of staff, congrats! This is a sign that your business is growing!
5. Clear Debts: If you have debts that are amassing high amounts of interest, why not use these funds to reduce these debts?
6. Upskilling: By taking on additional training or learning new skills, you can offer more to your clients or increase your rates based on your additional skills. Keep in mind that many training courses that are worthwhile take time, so make sure that you have the capacity to take on this additional pursuit.

Money insurance

When you’re self-employed, anything unfortunate that may affect your business will impact you directly. Don’t let all the hard work of analysing your finances go to waste by having these funds stolen.

No matter your business and the amount you make, you need to protect your money with money insurance. Money stolen from your business is money stolen from you, so don’t leave yourself vulnerable. Our team of experts is here to guide you through the complexities of business insurance and help you make informed decisions.

Dean Laming

Dean is a Chartered Insurance Broker with more than 25 years insurance experience. Through various underwriting, operational and management roles, Dean has built up extensive knowledge of how to run a business and is now Managing Director of Brisco Business, part of the wider Henry Seymour Group.

All articles by Dean Laming