Self-employed contractors have to calculate their expenses when they are finishing their tax returns.
What are allowable expenses?
Contractors cannot just deduct all self-employed expenditures. HMRC has set guidelines on what expenses are to be included and which ones cannot. Thus, the costs that are included in one’s calculation are coined as ‘allowable expenses.’
A contractor can be enabled to pay the right amount of tax if he understands the allowable self-employed expenditures and be able to solve for the profit accurately.
An example would be this:
A freelancer-writer earns £30,000 in the taxation year, but his allowable expenses total £5,000. He only needs to pay tax on £25,000, which is the taxable profit.
Here are the allowable self-employed expenses when completing a tax return:
Business stationery, postage, and printing costs are included. Computers, computer software, and printers can also be claimed as office expenses. Contractors can use these as capital allowances if they do not pay in cash.
Rental, property insurance, utility bills, and security expenses can be claimed. However, this excludes expenses for purchasing or building commercial structures.
If a business is home-based, then a portion of residential utility bills can be included. However, one needs to calculate the proportion of the home that is utilized for business. A contractor can use ‘simplified expenses’ if he works at home for a minimum of 25 hours a month. This is the flat monthly fee mandated by the government.
This category includes van costs, business-related costs, fuel, servicing, repairs, and breakdown cover. This might be confusing for a contractor, so he can choose ‘simplified vehicle expenses,’ which is again the government's flat rate.
Stock and materials
The cost of production is included in this category. Raw materials and the cost of stock are included.
Legal and financial costs
Hiring professionals such as an architect, a surveyor, a solicitor, an accountant for business operations can be included in the calculation of costs.
Charges on credit and bank charges, plus interest on leasing, and interest on bank and business loans, can also be included.
Business insurance cost that includes professional indemnity insurance and public liability insurance.
Marketing cost includes directory listings, newspaper advertising, free samples, mailshots, and website costs can be included.
The cost of a uniform can include protective gear and costumes for actors or entertainers. However, daily clothing expenses cannot be included.
Salaries of employees and staff count as allowable expenses. Employer National Insurance contributions, pension contributions, agency fees, fees, and bonuses also can be claimed.
Contractors can also include membership costs to trade bodies or professional membership organizations that are significant for businesses.
If you need help on how to solve tax-deductible expenses, you can contact us.