Nothing is quite so misunderstood as business expenses. Writing something off as an expense has a nice ring to it, but the reality of what that means still takes people by surprise.
Two of the most common misconceptions about business expenses are:
That you get money back…from… somewhere. (Nope)
You can claim for anything. (No again)
How business expenses work
Some people think that claiming business expenses means that you get the money back to you. This might be true for employees, but if you work for yourself, it can be a dangerous way of thinking.
The truth is, you won’t receive any money back from the government. Instead, your business expenses are offset against the money you earn through the business.
This is because businesses only pay tax on their profits – the money that’s left over when the bills are paid.
Income – expenses = profit
In other words, deduct your expenses from any money you earn in order for you to calculate your actual profit figures. This means that when HMRC calculates your tax bill, they will be going off profits, rather than your total income.
Expenses in action
If you charge someone £100 for a service, but you spend £10 in order to deliver that service, then you only made £90 profit. Therefore, you should only pay tax on £90 and not the full £100.
So if you’re subject to the basic tax rate, you would save 20% tax on £10, which would be a saving of £2. Applying this to all your expenses can add up to some hefty savings which really reduce your tax bill.