Self-Employment and Tax Savings Approach: Allowable and Non-Allowable Deductions
Running a business as a self-employed individual offers flexibility and independence, but it also comes with tax responsibilities. Understanding allowable deductions, tax-saving strategies, and accounting principles can significantly reduce tax liabilities and optimize financial planning. Below is a comprehensive guide detailing key tax concepts, including allowable and non-allowable expenses, capital allowances, trading losses, and partnerships.
Allowable Expenditure
What is an Allowable Expense?
An allowable expense is a business cost that is incurred wholly and exclusively for the purposes of running a trade. These expenses are deductible from taxable profits, reducing the overall tax burden.
Examples of Allowable Expenses:
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Office costs (rent, business utilities, stationery, phone bills)
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Staff wages and subcontractor payments
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Business travel expenses (fuel, mileage, train fares, hotels)
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Marketing and advertising costs
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Professional fees (accountants, solicitors, consultants)
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Work uniforms and safety gear
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Training courses related to the business
Illustration:
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Sarah runs a freelance graphic design business and incurs £2,000 in advertising expenses.
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Her total business income is £40,000.
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She deducts the £2,000 as an allowable expense, lowering her taxable income to £38,000.
Cash Basis for Small Businesses
Small businesses can opt for cash basis accounting, meaning they record income and expenses when they are received or paid, rather than when invoices are issued.
Key Features:
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Ideal for businesses with a turnover of up to £150,000.
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Helps manage cash flow efficiently.
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No need to account for unpaid invoices.
Example:
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John, a self-employed plumber, invoices a client £5,000 in December but receives the payment in January.
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Under cash basis accounting, John only records the income when received in January, delaying tax liability.
Relief for Pre-Trading Expenditure
Expenses incurred before a business starts trading can still be claimed as deductible costs in the first year of business.
Examples:
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Market research costs
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Initial advertising and website setup
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Training courses before business commencement
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Purchase of stock and equipment
Capital Allowances
Capital allowances allow businesses to deduct the cost of business assets used over time.
Types of Capital Allowances:
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Main Pool – Includes plant and machinery used in business.
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Special Rate Pool – Includes assets like integral features (e.g., lifts, heating systems).
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Writing Down Allowances (WDA) – Deducts a percentage of asset value annually.
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First-Year Allowances (FYA) – Provides 100% deduction for qualifying assets in the first year.
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Annual Investment Allowance (AIA) – Offers tax relief on purchases up to £1 million annually.
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Motor Cars – Relief depends on CO2 emissions (lower emissions = higher allowances).
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Assets with Private Use – Capital allowances are restricted to business use percentage.
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Disposal of Assets – Tax implications arise when selling assets.
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Balancing Allowances and Charges – Adjustments required if asset disposal value differs from the written-down value.
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Structural and Buildings Allowance (SBA) – Available on qualifying expenditure for commercial buildings.
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Short Life Assets – Assets expected to last fewer than 8 years are treated differently.
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Assets on Hire Purchase or Lease – Capital allowances apply when the asset is brought into use.
Relief for Trading Losses
Trading losses can be used to reduce tax liability in various ways:
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Opening Years' Relief – Losses in the first 4 years can be set against previous income.
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Terminal Loss Relief – When a business ceases trading, losses can be offset against profits of the last 3 years.
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Chargeable Gains of the Year – Losses can offset capital gains within the same tax year.
Partnerships and Limited Liability Partnerships (LLPs)
Partnerships
A partnership is a business owned by two or more people who share profits and tax responsibilities.
Tax Considerations:
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Each partner reports their share of profit/loss on self-assessment.
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Allowable deductions apply as in sole trader businesses.
Limited Liability Partnerships (LLPs)
An LLP provides limited liability protection while maintaining partnership taxation rules.
Key Benefits:
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Business debts remain separate from personal finances.
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More credibility and investment opportunities.
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Partners pay tax on their share of profits, similar to a partnership.
Change in Legal Ownership
When a business undergoes a change in ownership, various tax implications arise:
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Trading Loss Relief Available – If a business is transferred, trading losses may be available for relief depending on continuity conditions.
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Related Companies and AIA – The Annual Investment Allowance (AIA) must be split between related companies under common control, preventing excessive claims.
Non-Allowable Expenses
Certain expenses cannot be deducted from business profits.
Examples of Non-Allowable Expenses:
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Private living expenses
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Client entertainment costs
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Fines and penalties
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Loan repayments (though interest may be deductible)
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Non-business clothing
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Political donations
Example:
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Tom spends £3,000 on entertaining clients at a golf event.
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This is not deductible and must be declared separately.
How Accountants Can Help
Navigating self-employment tax rules can be complex. An accountant provides expertise to:
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Maximize allowable deductions and reduce tax bills.
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Ensure compliance with HMRC regulations.
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Provide tailored tax planning strategies.
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Assist with record-keeping and self-assessment filings.
Need Expert Assistance?
For further guidance on self-employment taxation, capital allowances, and tax-saving strategies, contact Acumen Accountants and Tax Advisers.
Contact Us:
📞 07534473220
🌐 www.acumenagc.com
✉ info@acumenagc.com
🏢 37th Floor, 1 Canada Square, London E14 5DY
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Disclaimer: The information provided is for general guidance and does not constitute professional tax advice. Tax laws are subject to change. It is recommended to consult with a qualified tax professional for personalized advice.
