One thing a lot of freelancers aren’t always prepared for are the costs of freelance life. You need equipment – a laptop at the very least, but often a tablet, maybe a work phone. Freelance photographers typically need expensive camera equipment. Often you’ll need to travel to meet clients or attend events. Then there’s your website, marketing, and accountant costs. It all adds up. Combining that with an income that can be unstable from month to month can make finances a tricky path for freelancers to tread.
What expenses can I claim as a freelancer?
Luckily, there are processes in the tax system that recognise these extra costs of being self-employed. HMRC provides a fairly comprehensive list of things that you can claim as expenses. When you fill in your Self-Assessment Tax Return at the end of the tax year, you can deduct the costs of these expenses from your taxable profit. This effectively means that you only pay tax on the extra money your freelancing business has earned – not on the bits you’ve had to pay out on essential things to keep your business running.
What are allowable expenses for freelancers?
For something to be classed as freelance expenses, it has to be a purchase for the running of your business and feature in the government’s list of allowable expenses.
It can’t be money taken from your business to pay for “private purchases” – so you can’t just spend it on anything and call it a business expense! As much as we’d love to claim designer handbags and Krispy Kreme dozen packs, it’s unlikely that these would class as allowable expenses and you could get into trouble with HMRC.
So what can you claim as freelance costs? It could be things like:
- Office costs: essential bits and bobs for around the office. This could be consumables like paper, printer cartridges; utilities like phone and internet bills or services like postage. If you rent premises for your business this would be an allowable expense, as would any associated rates, bills and insurances. Freelancers can also claim expenses if you use part of your home as an office.
- Travel costs: that train fare to attend a client meeting; van hire to get yourself and your equipment to photograph a wedding in a remote location; a taxi if you’re getting home late after an industry networking event. Travel expenses may have been reduced to nothing during coronavirus but they are likely to pick up again this year so don’t forget to account for them!
- Clothing expenses: this only really applies if you wear a uniform as part of your freelance work. Unfortunately, you can’t claim for those Zoom-friendly lounge pants, no matter how comfy they are.
- Financial costs: business bank account fees, small business insurance charges and hiring an accountant would all fall under this category.
- Advertising or marketing: if you’re spending money to promote your business, you can claim these costs back. For example, if you have a website designed or pay a monthly fee to host it. Business cards and advertising fees would also be covered here, as are memberships to any professional or trade bodies related to your field.
- Training courses: career development should be a priority for freelancers, but unfortunately the rules on what you can claim for here are surprisingly restrictive. HMRC are happy for you to claim for training that helps you improve the skills and knowledge that you use in your business – for example, refresher courses. Unfortunately, though, you’re not allowed to claim for training courses to help you start a new business or expand into new areas, even if they’re related to your current business.
You can also claim for staff costs or stock, but these are unlikely to apply to most freelancers selling services.
What are capital allowances?
Here’s where it gets a bit more complicated. If you buy bigger, longer-term purchases for your business – things that might be seen as assets – you need to claim these as capital allowances. This could be equipment like cameras, laptops, computers or tablets. It could be machinery or a vehicle like a car or a van for business uses. The only exception to this is if you use cash-basis accounting when you should claim them as allowable expenses – phew! More information on this is available on HMRC’s guide, but if you don’t understand all of this terminology, it might be worth talking to an accountant to help you get your business finances and book-keeping sorted.
How do I claim expenses when freelancing?
If in doubt about whether an expense is allowable, have a look at HMRC’s guide. It’s pretty detailed and a good starting point. If you’re still not sure, ask an expert like an accountant for their advice.
Remember to keep records, including receipts, of any expenses that your business incurs. HMRC may ask to see these if you are audited. Microsoft Lens is a good app that will allow you to quickly scan paper receipts using your smartphone. You can then total up the amount of expenses related to your business and deduct it from your takings at the end of the year, giving you your taxable profit. You’ll input these figures onto your Self-Assessment Tax Return.
Using a trading allowance
If your allowable expenses amount to less than £1,000 across the tax year, you may be better off using your £1,000 tax-free trading allowance instead. This will let you claim up to £1,000 off your taxable profits to cover the expected costs of running a business.
You can only claim either trading allowance or expenses – not both.
It’s a good idea to keep track of your expenses anyway even if you think you intend to claim trading allowance – that way you can get a good sense of your outgoings. If you know exactly what your expenses are, then you or your accountant will be able to work out whether it is more financially beneficial for you to claim: allowable expenses or trading allowance.
What about my self-employed insurance costs?
Smart cookies will have realised from this guide that business insurance is an allowable expense. And it’s one that can save you money in the long run, protecting you against claims for mistakes in your work, accidents that happen when you’re working out and about and making sure that you can get your precious business equipment replaced if it’s lost, stolen or damaged. Dinghy insurance is low-cost, hassle-free flexible freelance insurance. One great feature is the ability to pause your policy when you’re not working, reducing your bill for the month. A quote takes just 30 seconds on our website, and we’ll provide monthly billing emails that you can save to evidence your expenses to HMRC.
This guide is for information purposes only and does not constitute financial or legal advice. Please speak to an accountant or financial expert if you have any questions about claiming expenses for your freelancing business!