The NUMBER ONE way to reduce your tax bill? CLAIM YOUR EXPENSES!!
This is probably a phrase you’ve heard bandied about a lot in connection with business life.
Similar ones are:
- ‘’Write it off’’
- ‘’Claim it back’’
- ‘’Tax-free, AMIRITE??’’
And each of those phrases, as well as the many others you may have heard each suggest something slightly different … without ACTUALLY explaining how your business expenses work.
We meet many small business owners who have never had someone sit them down and properly explain how to ‘expense’ things in their business, how to figure out if an expense is worth it, and how to ensure that nothing comes back to bite them on the bum!
So, take a seat, let’s figure this out!
Here’s the basic rule:
Your Taxable Earnings = Your Income – Your Expenses x 20% or ⅕.
So, in real terms, if you’ve got £10,000 in income, and £1000 in deductible expenses, your taxable earnings would be £9000, and tax would be 20% of £9000, meaning £1800.
BUT tax-free thresholds, high earning thresholds, National Insurance, Student Loans and more do all play a part so please do speak to an accountant about your specifics!
Now that’s sorted, here are the 3 BIGGEST things we see that are misunderstood
1. That money IS NOT coming back!
- Here is where that phrase ‘claim back’ is more than a little misleading.
YES, you can include your expenses and reduce your tax, but the money you’ve spent on expenses, even if it takes your earnings into a loss is NOT coming back into your bank account. Whilst a loss could trigger a repayment of overpaid tax, HMRC is NEVER going to ‘reimburse’ you for your new stationary, your train journey to a networking event etc.
2. Spending money JUST to reduce your tax is not worth it
- As we spoke about earlier, your tax is only 20% (in a general sense!) of your income. So, expensing something worth £100 is costing you £100, but saving you tax of only £20. So, the expense effectively cost £80. If it was something you needed, then great, but if it wasn’t … well, bye £80!
- So, by all means, make purchases that you do need and want in your business, but don’t be fooled into thinking that you should spend all of your profit JUST to reduce your tax.
3. Not EVERYTHING to do with business is an expense. And getting this wrong could bite you in the bum in future!
- HMRC’s guidelines say that expenses need to be ‘’wholly & exclusively’’ for business. And basically, if they ever want to dig deeper into your finances,and find that you’ve been claiming some that aren’t, you’ll be paying that money back to them, and you could be in a bit of hot water.
- Our rule of thumb when speaking with clients about expenses is that if they would feel happy to speak face-to-face with ‘’the tax man’’ and explain WHY this is a legit business expense, then go for it. If they wouldn’t be confident to do that, then there’s your answer!
- Some expenses obviously do have both business & personal use, and for these you should work out the proportion of business use and claim accordingly.
- AND, even some expenses that you WOULD think were ‘’wholly & exclusively’’ business, are just not allowable, such as working in a coffee shop, or going to dinner with a client.
We’re not trying to scare-monger with any of this. In fact, we’re FED UP of seeing small businesses pay due to the massive lack of financial education available!
Check out more of our blogs and videos to keep educating yourself, and, of course, if you’d like to explore working with us, we’d love to hear from you!
