10 Tax Reliefs and Allowances Sole Traders Often Overlook
Running your own business means paying tax on your profits, but it does not mean you should pay more tax than necessary.
As a sole trader, there are a number of legitimate tax reliefs, allowances and deductions that can reduce your overall tax liability. Some are well known, such as claiming business expenses, while others are much easier to overlook.
From working from home and business mileage to pension contributions and loss relief, here are 10 areas worth considering when reviewing your tax position.
1. Make sure you are claiming all your business expenses
One of the simplest ways to reduce your taxable profit is to make sure you are claiming all the allowable expenses you are entitled to.
Generally, an expense must be incurred wholly and exclusively for the purposes of your business to qualify for tax relief.
Depending on your business, this could include:
Accountancy and professional fees
Business insurance
Advertising and marketing
Website and software costs
Office equipment and stationery
Business bank charges and qualifying interest
Telephone and internet costs
Business travel
Stock and materials
Professional subscriptions
Training and certain business-related courses
Rent and other costs associated with business premises
It is often the smaller, regular costs that get forgotten. A £20 or £30 expense might not seem significant on its own, but over an entire year these can add up.
Keeping your bookkeeping up to date throughout the year makes it much easier to identify these costs rather than trying to remember everything when your Self Assessment tax return is due.
2. Working from home? You may be able to claim for household costs
If you run your business from home, you may be able to claim a proportion of certain household costs as a business expense.
Depending on your circumstances, this could include costs such as:
Heating and electricity
Council Tax
Rent
Mortgage interest
Internet and telephone costs
You may also be able to use HMRC's simplified expenses method, which uses flat rates for certain costs rather than requiring you to calculate the actual business proportion.
However, simplified expenses are not necessarily the best option for everyone. If you have significant household costs or use part of your home extensively for your business, calculating the actual costs could potentially give a different result.
It is worth checking which method is appropriate rather than automatically using the simplest option.
3. Keep track of your business mileage
If you use your own car or vehicle for business journeys, you may be able to claim tax relief for the business mileage.
HMRC's approved mileage rates can provide a straightforward way of calculating the allowable amount, provided the relevant conditions are met.
The important thing is to keep a record of your journeys as you go. This should include details such as:
Date of the journey
Where you travelled from and to
The business reason for the journey
Number of business miles
Trying to reconstruct a year's worth of mileage from memory is rarely ideal.
It is also important to distinguish between qualifying business journeys and ordinary commuting, as travelling between your home and a permanent workplace will generally be treated differently for tax purposes.
4. Don't overlook capital allowances when buying equipment
If you are investing in your business, capital allowances could provide valuable tax relief.
Capital allowances can apply to qualifying assets such as:
Computers and IT equipment
Machinery
Tools
Office equipment
Certain commercial vehicles
The Annual Investment Allowance (AIA) can allow qualifying businesses to deduct the full cost of eligible plant and machinery from their taxable profits, subject to the relevant rules and limits.
There are also other forms of capital allowances, including first-year allowances and writing-down allowances.
This is particularly important when you are making a large purchase. An expensive piece of equipment should not simply be treated as an ordinary business expense without considering the correct tax treatment.
The rules can also differ depending on whether you use cash basis or traditional accounting, and private use can affect the amount you can claim.
5. Check whether you qualify for business rates relief
If you operate from commercial premises, business rates can be a significant overhead.
Depending on the property and your circumstances, you may qualify for business rates relief.
For example, Small Business Rate Relief can provide full relief for qualifying properties in England with a rateable value of £12,000 or less, with tapered relief potentially available for properties with higher rateable values, subject to the relevant conditions.
There are also other forms of business rates relief available in certain circumstances.
If you have recently taken on premises or your circumstances have changed, it is worth checking whether you qualify rather than assuming the full business rates bill is payable.
6. Consider pension contributions as part of your tax planning
Pension contributions are not a business expense in the same way as stationery or accountancy fees, but they can still form an important part of your overall tax planning.
Depending on your circumstances, personal pension contributions can qualify for tax relief. Higher-rate taxpayers may also be able to claim additional relief through their Self Assessment tax return.
This can be particularly relevant if your business has had a particularly profitable year and your taxable income has increased.
Rather than only looking at how to reduce the business's taxable profit, it can be useful to consider your overall personal tax position as well.
Pension planning should, of course, take into account your wider financial circumstances and longer-term plans.
7. Don't assume a trading loss is wasted
Not every year in business is profitable, particularly during the early stages of a business.
If you make a trading loss, there are circumstances in which you may be able to claim tax relief by setting the loss against other income or profits.
This can be particularly valuable for a new business that has significant start-up costs before it becomes profitable.
There are different rules and options for using trading losses, so it is important not to simply carry a loss forward without considering whether another claim could be available.
If your business has made a significant loss, it is worth discussing the options before submitting your tax return.
8. The £1,000 trading allowance could be useful – but it isn't always the best option
If you have a small amount of income from trading or a side business, the £1,000 trading allowance may be relevant.
Broadly, this can allow up to £1,000 of trading income to be covered by the allowance, subject to the rules.
However, there is an important point that is easy to miss.
If you use the trading allowance, you generally cannot also deduct your actual business expenses against that income.
For example, if your income is £1,000 but you have £700 of genuine allowable expenses, claiming actual expenses could produce a different result from using the £1,000 allowance.
The allowance is therefore not automatically the best choice simply because it is available.
9. Don't forget about VAT when looking at business costs
If your business is VAT registered, you may generally be able to reclaim VAT on qualifying business purchases, provided the relevant conditions are met.
This can make a significant difference if your business regularly spends money on:
Equipment
Stock
Software
Professional services
Business premises
Other operating costs
It is important to keep the appropriate VAT invoices and records and to understand that VAT treatment and Income Tax treatment are not the same thing.
For example, an expense may be deductible when calculating your taxable profits but the VAT position may be different.
If you are approaching the VAT registration threshold, it can also be useful to consider the wider implications of registration rather than treating it simply as an administrative exercise.
10. Think about your tax position before the year ends
Perhaps the biggest opportunity that sole traders overlook is planning ahead.
Your tax return tells you what happened during the previous tax year. Good tax planning looks at what is likely to happen next.
If you know your profits are going to be significantly higher this year, for example, there may be opportunities to consider before the tax year ends.
This could include:
Reviewing planned equipment purchases
Considering pension contributions
Checking that all allowable expenses are being captured
Reviewing any available loss relief
Considering the timing of certain expenditure
Reviewing your payments on account
Looking at your wider personal tax position
The earlier you understand your likely tax liability, the more time you have to make informed decisions.
Don't spend money just to save tax
It is important to remember that tax relief does not make an expense free.
If you spend £1,000 purely because you think it will reduce your tax bill, you will still have spent £1,000.
The objective should be to make sensible business decisions and then make sure you receive the tax relief you are legitimately entitled to on those costs.
Tax planning should support your business decisions, not dictate them.
Good record keeping can make a bigger difference than you think
You do not necessarily need complicated tax planning to avoid paying more tax than necessary.
Often, it comes down to having good records and knowing what to look for.
Keeping your business and personal spending separate where possible, retaining receipts, recording mileage, keeping your bookkeeping up to date and reviewing your figures regularly can all make it easier to identify opportunities and avoid missed claims.
It also means there are fewer surprises when your tax bill eventually arrives.
The Bottom Line
There are plenty of legitimate ways for sole traders to reduce their tax bill, but the key is knowing what applies to your particular circumstances.
It is not simply about putting as many expenses through the business as possible. Good tax planning is about understanding the rules, keeping accurate records and making sensible decisions throughout the year.
The biggest tax-saving opportunities are often found by looking beyond the obvious. Whether that is claiming for working from home, making the most of capital allowances, considering pension contributions, using available loss relief or simply keeping better records, small details can make a difference over time.
Rather than waiting until your Self Assessment tax return is due, taking a step back during the year to review your figures and consider what is coming up can put you in a much better position.
The aim isn't to avoid tax – it's to make sure you are paying the right amount, while keeping as much of your hard-earned profit in your business and in your pocket as legitimately possible.
This article is intended as a general overview of tax reliefs, allowances and expenses available to sole traders in the UK and should not be relied upon as specific tax advice. Individual circumstances can significantly affect the tax treatment of income, expenditure and reliefs, and tax rules can change over time. Professional advice should be sought based on your individual circumstances.