Navigating tax deductions as a self-employed sub-contractor can be challenging, but understanding what expenses you can claim can make a significant difference to your tax bill. Properly managing tax deductions not only helps lower your taxable income but also ensures that you are compliant with HMRC regulations. Here, we’ll break down the essentials of tax deductions for sub-contractors and explain which expenses you can claim to reduce your tax burden.
What Are Tax Deductions?
Tax deductions refer to expenses that can be subtracted from your total income to calculate your taxable profit. As a self-employed sub-contractor, you are entitled to claim deductions for expenses incurred “wholly and exclusively” for the purpose of running your business. By claiming these expenses, you reduce your taxable income, meaning you pay less tax overall.
Common Tax Deductions for Sub-Contractors
Travel Expenses
- Travel is a significant expense for many sub-contractors, especially those who work on multiple sites. You can claim tax deductions for travel expenses such as fuel, parking fees, and public transport costs. However, it’s important to note that travel between your home and a permanent place of work is not considered an allowable expense. Instead, you can claim for travel to temporary work locations or business meetings.
Tools and Equipment
- As a sub-contractor, tools and equipment necessary for your trade are typically tax-deductible. This can include purchasing new tools, repairing existing ones, and even hiring equipment for specific projects. Keep all receipts and records related to these purchases to substantiate your claims.
Work Clothing
- You may be able to claim money back for specialist work clothing, such as protective gear, safety boots, and high-visibility jackets. Ordinary clothing worn to work does not qualify as a tax deduction, but clothing that is essential for your trade does. Additionally, costs for cleaning, repairing, or replacing these items can be claimed.
Materials and Supplies
- The cost of materials and supplies used to complete a job can be deducted. This includes any raw materials purchased to carry out specific contracts or projects. If you buy in bulk, deduct only the portion used for business purposes within the tax year.
Professional Fees and Training
- These costs can be considered tax-deductible if you pay for professional memberships, licenses, or training directly related to your trade. For example, attending courses to upgrade your skills or renew your licenses may qualify. However, general education courses unrelated to your trade may not be eligible.
Subcontractor CIS Deductions
- Under the Construction Industry Scheme (CIS), contractors may deduct money from a subcontractor’s payments for tax purposes. These deductions are advance payments towards the sub-contractor’s tax and National Insurance. The deductions made will need to be accounted for when completing your tax return, and you should keep records of all CIS deductions.
Keeping Accurate Records
To claim tax deductions as a sub-contractor, keeping detailed records of all your business expenses is crucial. Make sure to save receipts, invoices, and bank statements that relate to your claims. HMRC may ask for proof of your expenses, so having comprehensive records will make it easier to substantiate your claims and avoid potential penalties.
How to Claim Tax Deductions
When you complete your annual Self Assessment tax return, you can claim tax deductions by declaring your allowable business expenses. The amount you claim will be deducted from your total income to calculate your taxable profit. This is why it’s essential to ensure you include all eligible expenses to reduce your tax bill as much as possible.
Mistakes to Avoid
- Mixing Personal and Business Expenses: Make sure to claim expenses only for business purposes. You can only claim the business portion if an expense is partly personal.
- Not Claiming Enough: Some sub-contractors miss out on tax savings by not claiming all their allowable expenses. Be thorough in reviewing your expenses to maximise your deductions.
- Poor Record-Keeping: Keeping proper records could lead to penalties and missed deductions. Make a habit of organizing your receipts and financial documents regularly.
Tax deductions can significantly impact your overall tax liability as a self-employed sub-contractor. Understanding which expenses qualify and keeping accurate records can maximise your tax savings and ensure compliance with HMRC. Regularly review your expenses and consult a tax professional if you need assistance with your claims.
For more information on tax deductions and support with your tax return, visit TaxAid or check out Subbie Tax for expert advice tailored to sub-contractors.