Tax deductibles are an important, yet bewildering part of the self-employed lifestyle. What can you claim? What can’t you claim? Is it worth claiming at all?
If you earn enough to be paying income tax, then you should be taking advantage of deductibles, as it can greatly reduce the amount you owe the taxman.
Any expenses that are deemed necessary for your business can be claimed as deductibles. Their value is then added to your allowance of untaxed income, reducing your tax bill and saving you money.
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Some of these deductibles are obvious things, like tools for the job, but others are a little more obscure and complicated.
1. Vehicle Expenses
Claiming tax back on a business vehicle, such as a delivery truck, is second nature to many self-employed people. However, if you often use your personal car to travel to business meetings, transport goods or anything else directly related to being self-employed, you can also receive tax relief.
Some of you may already know this, but simply chose not to because of the hassle it would be to sort out and divide up the costs of using the vehicle for business when you most often use it for personal reasons. However, there is a way around this.
The standard mileage rate is a system available which is based not on actual costs, say fuel receipts and repairs bills, but on an allowance that you can claim on a per mile basis. Say you drive 100 miles in a week, and 10 miles were for business, you can claim a basic rate for those 10 miles. This basic rate represents the average cost of everything including fuel, repairs, servicing and insurance for every mile traveled per year.
It isn’t a perfect system, as all vehicles have different running costs, but it is a simple and easy way to claim back large amounts you might simply just write off otherwise.
2. Retirement Plans
Saving for old you is important, and since you’re self-employed, nobody else is going to do it for you. Many self-employed individuals overlook the importance of saving for retirement, perhaps opting instead to put money into shorter-term nest eggs like savings accounts.
If you establish a retirement plan, all the money paid into the pot for future you is untouchable. The taxman can’t get any of it, up to a limit based on your earnings at least.
This effectively reduces the amount you are taxed each year as it creates a chunk of untaxable income, reducing your overall tax bill. Yes, that money might be tucked away, but it is still yours, waiting for future you to come and collect it.
3. Home Office Space
If you run your business out of an office, warehouse or any other kind of building used specifically for work, it should come as no surprise that you can claim on rent and utilities, but what about entrepreneurs who work at home?
Well, you can also claim too, and it’s not as hard as you might think. Providing you use the room only for work purposes, all you have to do is find out how much space the room takes out of your home’s total square footage, then deduct that percentage from your bills. Say your home office takes up 10% of your home space, then you can claim 10% of your bills as business expenses. Bills can include mortgage interest, insurance, utilities (gas and electricity) and repairs.
A simplified version of this also exists, similar to the standard mileage rate for vehicles, where you can simply apply a fixed amount to each square foot of your workspace and deduct it from your tax.
4. Insurance Premiums
Business insurance is vital for creating a stable future for your business. Big and unforeseeable costs can cripple your ability to function if not covered by insurers, and if you are unable to pay for the costs yourself, could see your business sink completely.
Insurances itself, however, doesn’t come cheap. Premiums can cost a small fortune, but fortunately, there is some relief available. Premiums are tax deductible plain and simple; as long as they are specific to your business.
5. Accounting Fees
If you are struggling to manage your accounts or aren’t sure exactly what items are deductible, it is advisable to bring in an accountant. Accountants can not only help ensure accurate records and that you have maximized your deductible potential, but they themselves are also deductible.
Accountancy fees are considered a necessary expenditure when it comes to being self-employed, thus you can claim on fees involving preparing tax returns, receiving accounting advice and more.
This article has been edited and condensed.
Russell Smith, founder and Managing Director of Russell Smith Chartered Accountants, began his accountancy business over a decade ago. Starting from the very bottom, he now has offices all over the UK and an expanding client base. Russell knows everything there is to know about accounting and the trials of being self-employed. Connect with @rsaccountancy on Twitter.
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