Tips on Writing off Your Taxes as a Sole Trader in the UK

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Tips on Writing off Your Taxes as a Sole Trader in the UK

You’re a sole trader. Congratulations. As well as possibly being able to work without leaving your bed, you can claim back many of the costs you incur in the course of your business as tax write-offs.

What can I write off on my taxes as a sole trader?

You might be a journalist, a plumber, a kitchen fitter or a masseuse. Whatever flavour of sole trader you are, you’re sure to incur costs as a result of running your business.

Of course, you’re taxed only on the profits that your business makes. That’s your income minus your personal allowances and expenses.

That means if you turn over £60,000 and have expenses of £20,000, you’ll pay tax on only £40,000 of your sales. But make sure your expenses are necessary – while it’s cheaper to buy stuff through your business, it makes little sense if you don’t need it.

Here’s our list of the main expenses you can take as tax write-offs as a sole trader.

1. Accountancy fees

Unless you’re a finance graduate, you’ll probably want to enlist a professional accountant to work out how much tax you should be paying. In fact, you might as well because sole traders can claim back the fees as a tax write-off.

2. Bank charges

That’s right. If your business account incurs overdraft fees, you have business credit-card charges, and you pay interest on business loans, you’ll be able to class them as business expenses.

3. Travel

Chances are, you have a car or van that you use at least in part for work. If you make business trips in your car, you’ll be able to at 45p per mile for the first 10,000 miles of any financial year, then 25p per mile for any distance after that.

Alternatively, you can use a simplified method where you work out what proportion of your car usage has been for business. To do this, you calculate your total annual running costs, including insurance, MoT, repairs, and fuel. Next, calculate the percentage of miles you do on business and apply it to your total running cost.

Deductible travel expenses

Here’s a list of the travel expenses you can claim:

  • Insurance
  • Fuel
  • Parking
  • Breakdown cover
  • Hire charges
  • Repairs and servicing
  • Bus, train, taxi, and airfares
  • Hotel rooms
  • Eating out during overnight stays
  • Vehicle licence fees

You can’t claim back:

  • Personal driving and travel costs
  • Fines
  • Commuting to work

Get yourself a handy mileage-tracking app, such as MileIQ and catch every drive accurately. Simply swipe right for business drives and left for personal drives.

Smiling young woman with her feet atop the desk using laptop at desk in office

4. Book and magazine subscriptions

It’s important to keep up with industry news and trends, so maybe you subscribe to Physiotherapy Monthly or Better Bathrooms. You can claim back the cost of books and magazines – just so long as they’re directly relevant to your business, obviously.

5. Business premises

Work from home? How much of your household expenses you can claim depends on the number of rooms in your home and which parts you use for business.

As a sole trader working from home, you can write off a proportion of your mortgage interest, utility bills and insurance costs against tax. You can calculate this proportion by doing a rough estimate of the square footage you use, or base your calculations on the number of rooms you use and for how long.

6. Equipment

Pretty much every sole trader needs at least one computer, and the good news is that they’re tax write-offs. The same applies to other equipment – for example, if you run a riding stable, you’re going to need lots of tack and you can also claim this as a business expense.

7. Goods for resale

If you work in retail, or ‘etail’, you’ll buy goods and stock wholesale so that you can sell them on. You can claim the cost of these goods as an expense.

8. Promotion

As a sole trader, you’ll also need to promote your business. That means PR, marketing and advertising. Whether you use an agency or an individual, their fees can be written off against tax.

9. Communications

You can claim for telephone calls and texts that relate to work. However, it can be tricky keeping tabs on which calls and texts are for personal use and which for business. Some sole traders use two mobile phones – one for business and one for personal use, then submit the business-phone receipts as one entity.

You can also write off a proportion of your broadband bill, although you’ll need to keep a record of the hours you spend online and how much is business and how much personal use. An alternative is to monitor usage for a week or two every quarter to get a representative figure.

Young woman at desk in office holding model and using graphics tablet

10. Training

Whatever field you’re in, it’s vital to keep your skills up to date with ongoing professional development. Happily, you can claim back these costs against your profits. If you’re learning a completely new skill-set, HMRC sees that as capital. Speak to your accountant about this.

11. Insurance and fees

You might need to take out insurance for your business, such as public liability insurance or professional indemnity insurance. That’s also tax-deductible.

What about professional fees? You might need to be a member of the Chartered Institute of Public Relations or the Royal Economic Society. According to HMRC’s Employment Income Manual, membership costs are tax-deductible if ‘the activities of the body are of direct benefit to, or concern the profession practised in, the performance of the duties of the employment’.

It’s also worth noting that, for subscription fees to be tax-deductible, only organisations found in HMRC’s List 3, ‘Approved professional organisations and learned societies’ qualify.

It’s clear you should keep accurate records of all these expenses, plus all your receipts in hard copy or scanned form, to support your claim.

What does a sole trader pay in taxes?

A sole trader pays income based on business profits. It’s up to you, or your appointed accountant, to set out your income and expenses every year.

There is also Class 2 National Insurance Contributions (NICs) to be made at a flat rate of £2.85 each week every six months. If your annual profits are higher than £8424, you’ll need to pay Class 4 NICs (that’s 9 percent on profits up to £46,350 and 2 percent on anything above). You pay NICs with your income tax, with the sum worked out from your self-assessment tax return.

Should your turnover exceed the £85,000 VAT (Value-Added Tax) threshold in any rolling 12-month period, you’ll need to be VAT-registered.

What does this mean? When you’re VAT-registered, you charge your customers VAT on VAT-able goods and send it to HMRC. You can reclaim VAT on items that you buy for the business. The rate of VAT in the UK has been 20 percent since 2011.

Are sole traders and limited companies taxed differently?

HMRC assesses sole traders and limited companies differently for tax purposes. A limited company is taxed as a separate legal body from the owners and directors. On the other hand, if you operate your business as a sole trader, you and the business are taxed as one entity.

Limited companies must also pay corporation tax on their annual profits, with directors completing a self-assessment form on which they must detail any income they’ve taken out of the business.

When you become self-employed, you must tell HMRC about your new status within three months. Once you’ve registered, you’ll automatically be sent a self-assessment notice at the end of the tax year (5 April).

In the Internet age, HMRC encourages businesses to submit their returns online. It’s secure and simple, and you can get more details at HMRC’s online self-assessment service.

If you’re insistent on sending in a paper tax return, you’ll need to do that by the 31 October after the last tax year. But another good reason to send yours in online is that you get another three months to complete your return. The deadline for online submission is the 31 January.

For example, for the tax year ending 5 April 2018, you’ll need to send your paper return to HMRC by 31 October 2018. For the online version, it would be 31 January 2019. You must pay all tax you owe for that tax year by the January deadline.

Now that you’re armed with all the bare facts about becoming a sole trader, what’s stopping you setting up? After all, you’ll never have a better chance of working in your PJs with a cat in your in-tray.

Nigel Graber

Nigel Graber has been a freelance copywriter and small-business owner in the UK since 2003. He works with sole traders and start-ups right through to blue-chips and multinationals.

MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.

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