What business expenses can I claim as a sole trader or limited company?
As a rule, you can claim for expenses that are incurred wholly and exclusively for business trading purposes. This applies whether you are a sole trader or a limited company.
Although you don’t need to have a separate bank account as a sole trader, it is recommended so that you can keep track of what is being spent through the business.
Costs can soon mount up, especially in the early days, and being able to clearly see what you are spending can be a great help.
Limited company owners must have a separate bank account in the company name. You can either pay your business expenses directly from your company’s bank account, which is best practice, or if it is easier for you to pay with your own personal money then you can just reclaim any qualifying expenses paid by you from the company, without any tax implications.
Most qualifying expenses can reduce your company’s corporation tax liability, although there are some exceptions.
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What travel expenses can I claim?
For sole traders, there are many common expenses that can be claimed. If you are a mobile beauty therapist, for example, you would be able to claim your travel expenses to see your clients, or attend training or industry events. These could include vehicle insurance, parking and fuel.
For limited company owners, if you have a permanent place of work, you cannot claim for the commute between there and your home, but if you travel elsewhere for business purposes, you can claim the travel costs.
If you use your personal or company vehicle to travel to a temporary place of work, or on general business use, claiming mileage can be the most tax-efficient way of reclaiming for the costs of fuel, as you are able to distinguish the travel that was purely for business use by keeping track of the mileage.
You can also claim things like parking costs and congestion charges, as well as food and drink bought during overnight trips.
Can I claim business costs and establishment allowances?
If you run a sole trader business from a physical location, such as a salon, you can claim expenses for fixtures and fittings, like chairs and nail stations, and also for the running costs of the salon, as allowable expenses because you needed them to operate your business.
If any equipment you use is also used for personal use, then you can only claim the portion of the cost relevant to the use of the business – for example, mobile phones, software and computers.
For limited companies, as with sole traders, any costs relating to your place of work may be claimable. This can include equipment, work phone contracts and broadband payments – as long as your mobile contract is in your company’s name and used solely for business purposes – and all stock for either use or resale.
Can I claim expenses for working from home?
As a sole trader, if your address is named for residence and business, you can claim a proportion of costs for expenses like utilities, mortgage interest, rent and broadband use.
However, as some of these costs will include personal use, only business costs are eligible. This is done by dividing bills by the number of rooms used for business purposes, or the amount of time spent working at home.
For limited companies, if your home is the heart of your business then you can claim a percentage of household costs and utility bills as business expenses. Again, this can be worked out by what rooms you use and the amount of time they are used for work purposes.
You can also claim the costs of lighting, heating, postage and printing, as well as accountancy and legal services, as long as they’re used solely for business purposes. Running a business from home can, however, have other implications you may not be aware of, such as the need for additional business insurance, incurring business rates, and losing entitlement to tax efficiencies on sale of your property.
What salary and pension tax relief can I claim?
As a director of a limited company, if you choose to pay yourself a salary as an employee of the business, this, and the corresponding National Insurance contributions (NIC) can be claimed as allowable expenses. Be aware that once you reach the NI threshold, you’ll need to start paying NICs.
Once you’ve established an agreement with a pension provider, you can pay into your pension pot and receive 100% tax relief as a limited company expense. However, there is a £40,000 limit on how much money you can add tax-free to a pension scheme each year.
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How to manage expenses as a sole trader or limited company
The above are some of the most common expenses but it’s important to note that this is not exhaustive and there may be others. Claiming all the expenses that you are eligible for as a sole trader or a limited company owner will reduce your tax liability and so help to keep your business in the best possible position.
To avoid any queries or potential fines from HMRC, it is so important to claim for the right expenses and keep all your receipts for at least six years. Take the time to consult an accounting expert to ensure your claims are accurate and in line with business needs and costs.
Want to know more about how to create a budget for your beauty businesses? Find out here.
Joanne Thorne is the technical compliance manager at SJD Accountancy, which specialises in tax and accountancy services for sole traders, limited company owners and small businesses.