Tax as a self-employed freelancer: top tips to simplify your HMRC affairs

Tax is often the last thing on your mind when you are running your own business, but getting your tax right, especially in relation to expenses, could save you some time and money.

And not just getting your HMRC affairs solely 'right' -- but getting them arranged simply, so that they fit around your business, whether you’re at the client site; working from home, or on the road, is important.

Given that there’s a cost of living crisis on, and base period reform is looming, it’s worth clarifying expenses rules for the self-employed now, while offering you some timely tips to simplify your tax affairs, writes Claire Thackaberry of the Low Incomes Tax Reform Group (LITRG).

Business expenses

When running your own business, some expenses to include as a deduction in your accounts are obvious, such as a work laptop or stationery. But some may be forgotten, perhaps because there isn’t a specific receipt for the cost.

You may be able to legitimately reduce your tax bill when you consider all the costs that you incur when running your business. The following is not an exhaustive list but may act as a reminder for some potential ‘forgotten’ freelancer costs:

Mobile phone and cloud storage
Trade subscriptions
Software such as an anti-virus package
Broadband
Mileage for business trips and associated parking charges
Business insurance
Printer ink
DBS checks
ICO registration fees

It may be the case that some of these costs have a personal as well as a business element.

You can only claim for the business element so, for example, if you use your mobile phone for half the time for business purposes then you can only include 50% of the costs in your accounts.

Simplified expenses

The simplified expense rules were introduced by HMRC to give a flat-rate allowance for three categories of expenses, instead of calculating the exact cost and /or claiming capital allowances. Be aware though, these amounts haven’t been increased since they were introduced in 2013.

It may be easier to calculate (but not necessarily financially beneficial) to use the simplified expenses rules for the following categories:

Mileage costs
Working from home
Living in your business premises (for example, if you run a guest house and live on-site).

The first two simplified expenses are probably relevant for most freelancers, and can be considered instead of using a proportion of actual costs.

Mileage costs

For cars and goods vehicles, you can claim 45p per business mile for the first 10,000 miles then 25p for further business mileage.

If you use a motorcycle, the mileage allowance is 24p per business mile and for a bicycle, it is 20p per business mile.

Remember to keep business records showing the date of travelling, number of business miles, and purpose of your journey.

Working at home

You can claim a flat-rate allowance based on the number of hours you work from home, instead of calculating the business proportion of utility bills.

The current simplified expense rates are as follows:

Number of hours worked from home per month

Allowable amount

25 - 50

£10.00

51 - 100

£18.00

101 or more

£26.00

If you do claim using the simplified expense rules, then you can additionally claim a business proportion of household expenses such as council tax, mortgage interest and internet and phone costs -- if relevant.

As mentioned above, it may be the case that you get more tax relief by claiming the actual business proportion of total motoring costs and home-running costs.

There are several examples of how working at home costs may be apportioned in HMRC'sBusiness Income Manual.

Tax reliefs

As well as considering if you have included all your business expenses, there are some tax reliefs and allowances which you may be eligible to use.

If your actual business expenses are £1,000 or less, then you may consider using the ‘trading allowance’ instead of actual expenses.

This allowance is in addition to your personal (tax-free) allowance and may be of use to sole traders with low costs, including those starting to trade in the tax year as the trading allowance is not pro-rated for a part-year. Unfortunately, it can’t be used by partnerships. There is more information on the allowance here.

If you make charitable contributions or pay into a private personal pension, then you may also be able to claim tax relief on the charitable donations or pension contributions. Don’t forget to include the information on your tax return!

Final thoughts

Although this article cannot cover all expenses, allowances and reliefs which the self-employed are eligible to claim, the few key areas covered here should act as a prompt to consider whether you are claiming everything you could be!

As mentioned, while the flat-rate method might be financial disadvantageous – particularly as HMRC has not updated the rates in almost 20 years, there will be value to some self-employed people in the simplicity which the 'simplified' flat-rated system offers. Should you need further guidance then we have a dedicated page where you can expore getting extra help with your expenses, HMRC affairs and tax matters.