Self Employed Tax Allowances

Basically when you are self employed you spend money on 3 types of expense:

1. Capital Expenditure – Equipment & Vehicles

2. Business Expenditure – stock, wages, premises

3. Private Expenditure – day to day living expenses – mostly not allowed but some types of cost may still count as business expenses

In general its types 1 and 3 where sole traders and partnerships miss out on tax allowances.

For example, you could claim capital allowances on your car,

Example: If you are self-employed, you pay Income Tax and your accounts are drawn up for the year to 5 April 2011 and you spent £20,000 on a car that you use 100 per cent for your business that has CO2 emissions of 165g/km, the calculation is as follows:

Cost of car = £20,000
Writing-down allowance deducted (£20,000 x 10 per cent) = £2,000
Value to carry forward = £18,000
Capital allowance you can claim = £2,000

If you use your car partly for private and partly for business you simply disallow a % for private use.

On other assets there is an Annual Investment Allowance which is currently £100,000 per year but will drop to £25000 in April 2012.

For most business that will cover all their capital expenditure, but there are further allowances available too.

With regard to private expenditure, there are tax reliefs available for working from home

If you have to spend money on tools or specialist clothing for your job you may be entitled to either:

  • tax relief for the actual amounts you spend
  • a ‘flat rate deduction’

3 thoughts on “Self Employed Tax Allowances

  1. As a self-employed person you are also required to pay a very special tax levied only on self-employed people – Class 4 NIC.

    This is 9% on taxable profits between £7,225 and £42,475 ( a maximum of £3,172.50).
    plus 2% on profits above £42,475.

    HMRC’s table of benefits for the different classes of NIC shows that Class 4 contributions attract NO benefits.

    For this reason, unless net profits are less than £10,000 or so, it is almost always cost effective to operate as a limited company rather than being self-employed.

    Peter Lashmar
    Lashmars Tax Accountants

    1. Yes I agree, but many small business start off with an initial tax loss, not least because of the investment needed to get started (ie Premises, Equipment etc) and being self employed provides the opportunity to offset these losses against other income (including employment) so its often the case that businesses will start off as Sole Traders or Partnerships and the convert to a Company once they are established.

      Excellent comment though, thanks Peter

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