Recent research has revealed that a significant minority of the self-employed have little, or no idea what they can claim for as an expense on their Tax Returns. It’s even worse with PAYE workers, many of whom do not claim for costs or allowances that they’re entitled.
This, of course, could result in the taxpayers paying additional and unnecessary Income Tax & National Insurance by not claiming their full entitlement.
It is arguably even worse to claim for expenses that you’re not entitled to, leaving you open to penalties and compound interest from HMRC and possibly a full-blown tax investigation.
Income Tax Relief: Self-employed
If you are one of the millions of the vast army of the self-employed, most of you will know that Net Profit from your business forms the basis of your annual bill. Worryingly, however, many of you do not appear to understand how to arrive at the correct Net Profit for tax purposes accurately.
Other than the one-man or woman bands (micro-businesses), most people in business employ an accountant to accurately calculate the correct tax and NIC due. Unfortunately, nearly half of individuals who do not hire an accountant do not know what they are entitled to claim and as a result, get it wrong.
Individuals running micro-businesses fall into one of two categories: running their businesses from home or visiting customers at their home/business premises.
Working from home
Working from home covers a wide range of professions from eBay retailers to computer software experts and everything in between. However, what is generally true for anyone in this category is that the potential expense items available to claim for are more limited.
They generally fall into the following categories:
- Additional costs of using your home for business
- Computer costs, both hardware and software
- Printer costs, both paper and ink
- Landline, mobile and internet costs
- Relevant subscriptions and memberships
- Direct costs, such as eBay charges or web-hosting fees
Of course, this list is not exhaustive, but does cover the main areas that a business based at home can claim for; but remember, most of these costs have a personal element of usage. If the question is asked by HMRC, you will have to be able to demonstrate that the business/private split is fair and reasonable.
In addition to the above, if you visit clients’ premises, whether you are a tradesman or possibly a mobile hairdresser, the main additional expenditure, apart from direct costs, are travel and public liability insurance.
You can make it easy for yourself by keeping an accurate mileage log and HMRC will allow you to claim 45p per mile for the first 10,000 business miles in the tax year and 25p per mile for all additional miles. Alternatively, you can keep every bill for your vehicle including the purchase cost, insurance, road tax, fuel receipts, repairs/servicing and cleaning, then claim a percentage based on an accurate mileage log.
Income Tax Relief: PAYE employee
You might think that it’s much easier if you’re an employee, but this can be a potential minefield as well. Most employees are either ignorant of what they can potentially claim for or assume that their employers will ‘take care of it’, wrong!
Unfortunately, many employers either don’t know themselves or don’t bother telling their staff. So, assuming that your employer hasn’t already reimbursed you, the following are the main areas that it may be possible to claim tax relief from HMRC: –
- TRAVEL – If you travel for work (excluding home to office), the actual costs of travel and any services you have to pay for while on your trip. This includes the actual fees of rail or bus journeys, or if you use your car, mileage at the rates shown above.
- HOTELS – If it’s unreasonable or impractical to journey home, the cost of a hotel and other services, such as meals and parking, can be claimed.
- TELEPHONE & INTERNET – If your employer expects you to do a certain amount of work at home, such as contacting customers by ‘phone/internet, a portion of your domestic ‘phone bill may be eligible.
- MEMBERSHIPS & SUBSCRIPTIONS – If belonging to a professional organisation is necessary to do your job; for example, a pharmacist or a property surveyor, these are eligible in full.
- UNIFORMS – You cannot claim for buying a uniform unless it’s protective clothing or safety wear; but you can claim for the costs of cleaning, replacing or repairing it.
- TOOLS – If you need to buy tools in order to do your job, but only if these are not supplied by your employer.
And do not forget, if you are making a claim, HMRC will expect you to retain documentary proof or some alternative form of evidence to back it up.
How to claim Income Tax Relief as an employee
There are four possible methods:
- Assuming your employer is willing and the tax involved is less than £2,500, you can obtain incremental tax relief via a PAYE Coding Notice
- Claim online at https://www.access.service.gov.uk/login/signin/creds, but don’t forget you will need a Government Gateway Account
- You can claim Income Tax relief by downloading and printing off, HMRC form P87, so go to https://www.gov.uk/guidance/claim-income-tax-relief-for-your-employment-expenses-p87#claim-by-post
- If you already complete an SA100 Tax Return, you can claim for your expenses via this
Claiming Income Tax Relief Summary
For both self-employed individuals and employees, the areas of a potential claim for both groups (as shown above), are not meant to be exhaustive but do cover the main areas where it may be possible to claim tax relief.
As an employee, what you can and cannot claim form is relatively black and white, however for the self-employed, it is significantly more complicated, and you would be foolish not to employ the services of a tax professional.
Most accountants will be prepared to have an initial chat and discuss your tax affairs without charge and will be able to give you a quote for the cost. So do your research and pick up the ‘phone as you may well be pleasantly surprised how inexpensive it can be to have your tax return prepared professionally.
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.