Regardless of your profession as a writer, an entertainer, a physical therapist, or a tutor, you will obtain costs as a result of running your business. Some of these costs in running your business could be claimed as business expenses.
If you need a quick yet concise guide regarding claiming expenses, here are the most important details regarding your claim as a sole trader or as a limited company and how these expenses could influence your tax claim.
Sole traders and self-employed workers
You will be taxed based on your company’s profits if you are a sole trader. Profits are obtained by obtaining the difference of your expenses and personal allowance from your income.
If you earned £200,000 and had expenses of 80,000, you need to pay tax on £120,000 minus any personal allowances. It is important to note that even if you pay less tax, then you would have to spend £80,000.
You can purchase items in a more affordable manner if done through the business and not personally.
There are simple steps involved in claiming expenses through your company. You can get the sum total of all the expense receipts for the year and put this amount on the yearly self-assessment tax return. These expenses must be exclusively for company use and not as a business expense. HMRC recommends keeping the receipts for seven years after incurring the costs. These will serve as evidence of all purchases by the company.
The process required in claiming expenses is quite different with a limited company compared to a sole trader. It is still simple. You just need to transfer funds from the business bank account of a limited company to your personal bank account. Keeping all the business expense receipts is also important.
Taxation involves profits. This is defined as the company’s total turnover minus the expenses. Say, the annual profit is £30,000. You only need to pay 20% corporation tax on this amount.
Expenses are business costs that have been incurred for the sole and exclusive use of the business. This is similar to both a limited company and a non-limited company. However, there is a slight difference in claiming these expenses for these two business types.
If you are a business owner who either runs as a sole trader or as a limited company, you can ask our accountants for further details on how to claim expenses.