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Self-employed

If you’re self-employed you can get tax relief for all the business expenses you pay that are just for your business. If you pay for something you use for business and privately – like your phone – and the bill can be split, you can get relief for the bit that’s just for your business.

Your business expenses might include:

• buying stock or materials and paying subcontractors
• business premises costs
• repairs and renewals
• motor and travelling
• advertising
• legal and professional fees
• general office costs

How Blind Person’s Allowance works

Blind Person’s Allowance is added to your tax-free Personal Allowance – so is an extra amount of income you can get each year without paying tax. If you are on a low income or even if you don’t pay any tax you may be able to transfer your Blind Person’s Allowance to your spouse or civil partner – see the section on transferring below.

How you get Blind Person’s Allowance

If you think you may be able to claim Blind Person’s Allowance contact HM Revenue & Customs (HMRC) on their priority telephone number 0845 366 7887. Lines are open from 8.00 am to 8.00 pm, Monday to Friday and 8.00 am to 4.00 pm, Saturday.

Who can get Maintenance Payments relief?

You can get Maintenance Payments relief if all of the following apply:

• you or your ex-spouse or former civil partner were born before 6 April 1935
• you’re separated or divorced or the civil partnership has dissolved and you’re making the payments under a Court Order
• the payments are for the maintenance of your ex-spouse or former civil partner (provided they aren’t now remarried or in a new civil partnership) or for your children who are under 21

For the tax year 2009-10 it can reduce your tax bill by the lower of the following two amounts:

• 10 per cent of £2,670 (£267) - this will apply where you make maintenance payments of £2,670 or more a year
• 10 per cent of the amount you’ve actually paid - this will apply where you make maintenance payments of less than £2,670

You can’t claim a tax reduction for any voluntary payments that you make for a child, ex-spouse or former civil partner.

Who can get Maintenance Payments relief?

You can get Maintenance Payments relief if all of the following apply:

• you or your ex-spouse or former civil partner were born before 6 April 1935
• you’re separated or divorced or the civil partnership has dissolved and you’re making the payments under a Court Order
• the payments are for the maintenance of your ex-spouse or former civil partner (provided they aren’t now remarried or in a new civil partnership) or for your children who are under 21

For the tax year 2009-10 it can reduce your tax bill by the lower of the following two amounts:

• 10 per cent of £2,670 (£267) - this will apply where you make maintenance payments of £2,670 or more a year
• 10 per cent of the amount you’ve actually paid - this will apply where you make maintenance payments of less than £2,670

You can’t claim a tax reduction for any voluntary payments that you make for a child, ex-spouse or former civil partner.

If you receive maintenance payments

You do not pay tax on any maintenance payments that you receive.

How to get allowances and reliefs – employees or directors

If you’re an employee or a director, there are a number of ‘tax deductible’ expenses you might be able to get. These include the cost of professional fees or subscriptions, business travel and subsistence, tools and specialist clothing. You can backdate most claims for up to six years.

Allowable expenses

You can only get tax relief for allowable expenses. Expenses are allowable if they’re for the cost of:

• travelling you had to do whilst doing your job
• other expenses you had to pay whilst doing your job – and which related only to doing your job

You can’t ask for tax relief if your employer has already reimbursed you for the expense and has agreed a ‘dispensation’ with HM Revenue & Customs (HMRC).

You can find out more about the types of expenses that you can get relief for using the link below.

How you get tax relief for your allowable work expenses depends on whether or not you fill in a Self Assessment tax return.

By letter

The first time you ask for tax relief for your expenses you’ll have to contact HMRC in writing. If your expenses are over £1,000 you will be asked to fill in form P87 to give more details about them.

By phone

If you phone HMRC to ask for relief for your expenses they will be able to give you tax relief if all of the following conditions are met:

• your expenses are less than £1,000 (or £2,500 for professional fees and subscriptions)
• you’ve claimed them in a previous tax year
• they accepted your earlier claim
• you haven’t already been sent a P87 to complete

If you meet the conditions they will give you tax relief right away and repay any tax you’ve overpaid. Otherwise, you’ll have to fill in form P87 before they can allow your claim.

Form P810

If you don’t have to fill in a tax return each year, HMRC may still need to check your income every so often to make sure you don’t pay too much or too little tax, they do this by asking you to fill in form P810.

When you fill in form P810 you can use it to ask for tax relief for your allowable expenses. If your expenses are over £1,000, they will ask you to fill in form P87 as well to give more details about your expenses.

Form P87

HMRC will send you form P87 if any of the following apply:

• you ask them to
• you claim expenses over £1,000
• it’s the first time you’ve claimed
• you’re claiming expenses for a year before the previous tax year

The form asks for details about your expenses and how you worked out the amount you want to claim.

If you have more than one job, or if you change jobs during the tax year, you’ll need to fill in a separate form P87 for each job. If you don’t fill in form P87 after you are sent one, they won’t be able to allow your expenses claim. This means that you might pay too much tax.

How to get tax relief for expenses if you do fill in a tax return

You may have to fill in a tax return if:

• you pay tax at higher rate
• you’re a director
• you have other income you need to tell HMRC about

You can claim tax relief for your allowable work expenses on the employment page of the tax return.

If you claim tax relief for your allowable expenses on your tax return, you don’t need to complete form P87.

ow you’ll get tax relief for expenses – depending on the amount you claim

The way that you’ll get relief for your work expenses depends on the amount of your claim.

Claims up to £2,500

If your claim is £2,500 or less, HMRC will normally give you relief for your expenses through your tax code straight away. If you claim an estimated figure, they will review it at the end of the year, and make any adjustments that are needed in your tax code for the next tax year.

Claims over £2,500

If your expenses claim is for more than £2,500, they will give you relief in your tax code for the current year and for the next one – and send you a tax return to fill in, and also check your tax calculation for the previous year.

Tax relief on pension contributions

The government encourages you to save for your retirement by giving you tax relief on pension contributions. Tax relief reduces your tax bill or increases your pension fund.

Company or public service pension schemes

Usually your employer takes the pension contributions from your pay before deducting tax (but not National Insurance contributions). You only pay tax on what’s left. So whether you pay tax at basic or higher rate you get the full relief straightaway.

However, some employers use the same method of paying pension contributions that personal pension scheme payers use – read more in the section on ‘Personal pensions’.

If you’re a GP or dentist and contribute to a public service scheme you are taxed as self-employed for part of your earnings so should claim tax relief through your Self Assessment tax return.

Retirement annuities

Unlike personal pension providers, most retirement annuity providers – personal pension schemes set up before July 1988 – don’t offer a ‘relief at source’ scheme whereby they claim back tax at the basic rate. Instead you’ll need to claim the tax relief you’re due through your tax return, or if you don’t complete a tax return by telephoning or writing to HMRC.

Effect of pension contributions on age-related allowances

If you receive an age-related Personal Allowance or Married Couple’s Allowance HMRC will subtract the amount you contribute plus the basic rate tax from your total income and use the reduced figure to work out the value of your allowances. This may have the effect of increasing these allowances if your income was above the relevant ‘income limit’ that applies.

There are limits on how much tax relief you can get – read more in the section ‘Limits on tax relief’.

What happens if you don’t pay tax?

If you don’t pay tax you can still pay into a personal pension scheme and benefit from basic rate tax relief (20 per cent) on the first £2,880 a year you put in. In practice this means that if you pay £2,880 the government will top up your contribution to make it £3,600.

There is no tax relief for contributions above this amount.

Tax relief if you put money into someone else’s pension scheme

You can put money into someone else’s personal pension – like your husband, wife, civil partner, child or grandchild’s. They’ll get tax relief added to it at the basic rate, but this won’t affect your own tax bill. If they’ve got no income, you can pay in up to £2,880 a year – which becomes £3,600 with tax relief.

If the pension scheme rules allow it you may also be able to put money into someone else’s company scheme. You’ll not get tax relief on your contribution but the other person can get relief either through their tax return or by making a claim to HMRC by telephone or letter.

Limits on tax relief

You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension is subject to an ‘annual allowance’.

For the tax year 2009-10 the annual allowance is £245,000 and for the 2008-09 tax year it was £235,000. You pay tax at 40 per cent on any contributions you make that are above the annual allowance.

Repaying tax if your pension contributions are refunded

You can usually only get your pension contributions refunded if you withdraw from a company scheme within two years of starting payments. Certain events might shorten the time limit. Tax is deducted at 20 per cent for refunds of up to £10,800 and at 40 per cent on any excess above this. The scheme administrator deducts the tax before making the refund.

Personal Allowance

Nearly everyone who lives in the UK is entitled to an Income Tax Personal Allowance. This is the amount of income you can receive each year without having to pay tax on it. Depending on your circumstances, you may also be able to claim certain other allowances.

How do you get the Personal Allowance?

If you already pay tax through your job or pension, or if you complete a Self Assessment tax return, you should receive a Personal Allowance automatically.

If for any reason you are not receiving a Personal Allowance and you think you should be, please contact HMRC and they will check your entitlement with you.

In order to get the age-related Personal Allowance you need to complete form P161 ‘Pension Enquiry’.

If you think you’ve paid too much tax

If you want to claim a tax refund because you didn’t use your Personal Allowance, or for any other reason, you need to do so no later than 31 January five years after the end of the tax year (5 April) in which you overpaid tax.

For example, a claim for the tax year 2003-04 which ended on 5 April 2004 must be made by 31 January 2010.

Who can’t get the Personal Allowance?

You can’t claim the Personal Allowance if you are non-UK domiciled and claim the special ‘remittance’ basis of tax – whereby you only pay tax on income you bring into the UK. If you think this applies to you, please contact HMRC.

Other allowances you may be able to get

Blind Person’s Allowance

If you’re certified blind and are on a local authority register of blind persons, or if you live in Scotland or Northern Ireland and you are unable to perform any work for which eyesight is essential, you can claim Blind Person’s Allowance.

If you’re married or in a civil partnership and can’t use all your allowance, you can give the unused part to your spouse or civil partner. Even if you have no taxable income, it might be still worth claiming Blind Person’s Allowance as your spouse or civil partner could benefit from your allowance.

Married Couple’s Allowance - available to civil partners

You need to be a taxpayer to claim this allowance, because it’s deducted from your tax bill but it is possible to transfer the allowance to your spouse or civil partner.

You can claim Married Couple’s Allowance if:

• you’re married or in a civil partnership
• you’re a taxpayer
• you or your spouse or civil partner were born before 6 April 1935

Giving to charity – effect on your allowances

If you pay tax and give money to a UK charity or Community Amateur Sports Club (CASC) using Gift Aid, it’s important to let HMRC know as this has the effect of increasing the amount of tax-free income and related tax allowances you can receive.

Married Couple’s Allowance (includes civil partnerships)

The age-related Married Couple’s Allowance is an amount that HM Revenue & Customs (HMRC) take off your tax bill – so it only applies if you pay tax. If you don’t pay tax, or if your tax bill isn’t high enough to use up all of your Married Couple’s Allowance, you can transfer any unused allowance to your spouse or civil partner if they pay tax.

How to claim Married Couple’s Allowance

To claim Married Couple’s Allowance you simply telephone your Tax Office or write to them giving details of your marriage/civil partnership ceremony and spouse/civil partner (including date of birth). If you fill in a Self Assessment tax return you will be asked to include details of your Married Couple’s Allowance claim.

Transferring your Married Couple’s Allowance to your spouse or civil partner after the end of the tax year

If you don’t pay tax, or if your tax bill isn’t high enough to use up all of your Married Couple’s Allowance, you can use form 575 ‘Notice of transfer of surplus Income Tax allowances’ after the end of the tax year, to transfer any unused allowance to your spouse or civil partner if they pay tax. You can’t get a refund of any excess not used.

Use the link below to get a copy of form 575. If you don’t have access to a printer, you can ask HMRC to post the form to you. If you’re making a claim for repayment of tax on a form R40 Tax Repayment you can also request form 575 by ticking the appropriate box.

Electing to share or transfer your Married Couple’s Allowance before the start of the tax year

You can also decide to share the minimum Married Couple’s Allowance between you or, if you both agree, you can elect to transfer the whole of the minimum Married Couple’s Allowance to your spouse or civil partner.

In this case you’ll need to complete form 18 ‘Transferring the Married Couple’s Allowance’ (available from your Tax Office or below) before the start of the tax year.

Tax allowances and giving to charity

If you pay tax and give money to a UK charity using Gift Aid, it’s important to let HMRC know as this has the effect of reducing your income when they calculate your age-related allowances.

Tax allowances and reliefs – employees or directors

If you’re an employee or a director you might be able to get tax relief for business expenses you’ve paid for. These include the cost of professional fees or subscriptions, business travel and subsistence, tools and specialist clothing.

Key allowances and reliefs

There are several reliefs that you might be able to get to reduce your tax bill. If you think you might be able to get any of the ones listed in this article you can find out more about them by following the links.

Business mileage or fuel

You may be able to get tax relief for business mileage when you use your own vehicle on business, or for fuel you buy when you use a company car. You can’t claim, though, for your normal commuting costs.

Professional fees and subscriptions

You can ask for tax relief for the cost of fees and subscriptions you pay to some approved organisations – but only if you have to pay them, or if it’s helpful for your work.

Tools and specialist clothing

If you have to provide small tools or buy specialist clothing for your work – like a uniform or protective clothing – you may be able to get tax relief for the cost of them.

Capital allowances

If you buy something like a filing cabinet or a desk for your work – called capital expenditure – you might be able to get capital allowances to help with the cost.

Household expenses when working at home

You may be able to get relief for some household expenses and some travelling costs if you work from home. You might also be able to get capital allowances for capital expenditure.

Travel and subsistence costs

You may be able to get relief for the cost of business travel – for example if you need to visit a client or go to a temporary workplace. You can also ask for relief for ‘subsistence’ – the cost of meals and overnight expenses.

Special rules and situations

There are some special rules or arrangements for certain tax allowances and reliefs, for example if you’re:

• working on board a ship
• working or living abroad
• coming to work in the UK

How to get tax relief

You can ask for tax relief for your business expenses on your Self Assessment tax return if you have to fill one in.

If you don’t have to, you can use a form P87 ‘Tax Relief for Expenses of Employment’ to tell HMRC about the expenses you want to ask for relief for or sometimes you can just call them.

Tax allowances and reliefs if you’re self-employed

If you’re self-employed there are various deductions, reliefs and allowances that you can get to reduce your tax bill. You deduct some from your gross business income to work out your profits. And you deduct others from your profits after you’ve worked them out.

You can deduct most of your business expenditure to work out your profits – but you can’t deduct any private expenditure. And you can claim special reliefs for ‘capital expenditure’ – one-off expenditure to buy or improve an asset you keep and use for your business.

You can usually get deductions, reliefs and allowances for the current tax year and for the previous six years – but there are some where you have a shorter time limit for claiming.

Types of expenditure and associated tax relief

While you’re running your business you’re likely to spend money on different sorts of things. Your expenditure will usually fall into three different types:

• capital
• business
• private

The type of expenditure it is affects whether – and how – you can get tax relief for it.

Capital expenditure

Expenditure on buying, creating or improving a business asset that you keep to earn the profits of your business is capital expenditure. So, the cost of buying a van for your business is capital expenditure but the cost of hiring it isn’t.

Other examples of capital expenditure include the cost of buying business premises, machinery, computers, fixtures and furniture.

You won’t be able to get tax relief for all types of capital expenditure. And if you can, there are special rules for how you can claim it.

You can’t get tax relief for the full cost of an asset when you buy it. Instead, you can get capital allowances to reduce your taxable profits.

Business expenditure

You can get tax relief for your business expenditure as long as it’s not:

• capital expenditure
• specifically non-allowable – for example entertaining expenditure

But to be allowable expenditure, it must be ‘wholly and exclusively’ for carrying on and earning the profits of your business. This means that your sole purpose for the expenditure must be a business purpose.

You can get some private benefit from the expenditure and still get tax relief for the amount spent for your business, as long as either:

• the private benefit was incidental and not the reason for the expenditure
• you can clearly identify and separate the expenditure between business and private purposes

You can deduct the full amount of your allowable business expenditure from your business income to work out your taxable profits.

Private expenditure

Private expenditure is what you spend on your day-to-day living expenses and your normal household expenses. It includes the amounts you take from your business as a wage – your ‘drawings’.

It also includes the private part of any expenditure that’s for both business and private purposes.

Private expenditure is non-allowable expenditure – you can’t get tax relief for it.

Allowable and non-allowable business expenses

A business expense is allowable if it:

• isn’t capital expenditure
• isn’t specifically non-allowable
• is wholly and exclusively for business purposes

The most common expenses that are normally allowable include:

• cost of stock
• payroll costs
• premises costs
• repairs
• motor and travel expenses
• finance costs
• administration costs
• professional fees

Expenses incurred for both business and private purposes

Expenditure for a mixed private and business purpose is non-allowable expenditure. An example would be the cost of travelling to town to bank the business takings and do your private shopping at the same time.

If you can separate the expenditure between business and private purposes, the business part is allowable. So, if you use a car separately for business and private purposes, the proportion of the expenses that relates to:

• business use is allowable
• private use is non-allowable

You normally work out the allowable business and non-allowable private proportions based on the mileage covered for each.

Key expenses, allowances and reliefs if you’re self-employed

The expenses, allowances and reliefs that you can get vary from business to business. It isn’t possible to provide a complete list here, but some of the key ones are listed below – with links to more information.

Capital allowances

You can get capital allowances on the cost of:

• plant and machinery – including cars, vans, computers, equipment, tools
• fixtures and fittings – including shelves, furniture, electrical and plumbing fittings
• some buildings – including industrial and agricultural buildings

Motoring expenses

You can deduct the cost of using your car for business purposes. There are two ways of working out how much you can deduct:

• a fixed rate for each mile travelled on business, using our fixed mileage rates
• the actual expenses, worked out using detailed records of business and private mileage to apportion your recorded expenditure

Expenses related to premises

You can deduct the costs of maintaining your business premises – including rent, rates, heat, light, repairs and insurance. You can also deduct the business part of these costs if you run your business from home.

Administrative costs including professional fees and subscriptions

You can deduct the administrative costs of running your business, including advertising stationery, postage, telephone and fax. You may also be able to deduct the cost of trade or professional journals or subscriptions.

Special rules and situations

There are a number of situations when you might be able to get a particular tax relief or allowance.

If you’re a farmer, market gardener or artist

You might be able to reduce your tax bill by claiming to average your profits over two years.

If you have a lodger

If you have a lodger in your own home, you can claim Rent a Room relief – you won’t pay tax on rent up to a certain amount.

If you’re a foster or adult placement carer

If you’re a foster carer and your income from foster care is below a certain amount you won’t have to pay tax on it. If it’s more, you can use simplified ways of working out your profits.

If you’re an adult carer, you can choose to work out your profits by:

• claiming Rent a Room relief
• claiming a fixed expenses deduction
• keeping full records

Tax relief for ‘overlap’ profits

You use the profits shown by your annual business accounts to work out your taxable profits for each tax year – tax years run from 6 April to 5 April.

If your accounts don’t end on 5 April, the way you work out your profits for the early years of your business may mean that you’ll pay tax twice on the same profits. When your business ceases you can claim ‘overlap’ relief.

Tax relief if your business made a loss

If your business makes a loss you can get tax relief for it. You can do this by setting the loss against your:

• other income of the same year or the previous year
• profits from the business in later years
• profits for the business in the previous three years if your business has ceased

Tax relief for expenses when your business has ended

There are special rules for taxing income and getting relief for business expenses after your business has ceased – these are called ‘post-cessation’ receipts and expenses.

How to get tax relief

You can get your tax reliefs and allowances by filling in your Self Assessment tax return.