Whether you are the owner of a limited company or a sole trader, it is important to understand the expenses you can claim and the tax savings that these expenses bring.
Allowable expenses can significantly reduce the amount of Corporation Tax that a business needs to pay, so it is crucial to know what a tax-deductible expense is and what is not.
Expenses for limited company owners
Here are the key categories of expenses that a limited company can claim:
- Office expenses such as stationery and phone and internet bills
- Travel costs such as petrol and fees for public transportation
- Clothing expenses for uniforms or protective outfits and equipment
- Staff costs such as salaries and training
- Marketing expenses
- Vehicle expenses
- Insurance
- Rent on business premises
Sometimes businesses will be able to claim tax-deductible expenses on expenses claimed by employees.
These include certain expenses employees incur during their work, such as buying lunch when visiting a client or at an exhibition.
Employee expenses such as these can be claimed back via payroll.
Any business expenses must be for work purposes rather than personal use, and all expense claims must be documented to ensure that businesses can claim tax back from HM Revenue & Customs (HMRC).
While there are many expenses that companies can claim against tax, it is important to note the expenses that are not tax deductible. These include:
- Salary paid as dividends
- Taking clients out for dinner
- Gifting clients anything over the value of £50 or food, drink and tobacco of any value
- Legal fees and fines
- Improvements or renovations to capital assets such as business premises
Expenses for sole traders
As a sole trader, your business expenses can be deducted from your income, reducing your Income Tax and National Insurance contributions (NICs).
Use of home
Using a portion of your household expenses to reduce your taxable profit can lead to significant tax savings.
However, you need to calculate these expenses carefully, as excessive claims may attract scrutiny from HMRC.
Capital allowances
Sole traders can claim capital allowances on purchases of things used in the business. These include:
- Equipment
- Machinery
- Vehicles for business use
Claiming these can reduce your taxable profit, effectively reducing your income tax bill. However, it is crucial to understand that different assets have different rates of allowances.
If you use anything for both business and personal use, you will only be able to claim expenses on the costs incurred when the item in question was used for business.
Simplified expenses
Sole traders can take advantage of simplified expenses, a way of calculating business expenses using flat rates instead of working out actual business costs.
These flat rates can be used on expenses for business vehicles, working from home and living in the business premises.
The GOV.UK website has a tool to see if simplified expenses are better for sole traders to use.
Claiming allowable expenses can significantly reduce tax liabilities for business owners of limited companies and sole traders.
However, it is essential to understand what is and is not allowable, and how these expenses impact your tax calculations.
For valuable insights tailored to your specific situation, please contact our team of tax experts today.