Tax Category Tax: calculations, VAT, self-employment tips and more

Tax benefits of being self-employed

The Federation of Small Businesses says that self-employed people contribute £21 billion to the British economy every year. Many see an increase in the numbers of self-employed people as a partial solution to the rising tide of unemployment.

With this in mind, the HMRC ensures that self-employed people are entitled to various deductions, allowances and reliefs that reduce their tax bill. These can be claimed for up to four years previously.

Working tax credits

Self-employed people with a relatively low income may be entitled to receive working tax credits – a regular financial payment to help them continue working. Call the Tax Credit Helpline on 0845 300 3900 to get a claim form.

You’ll need to provide HMRC with your national insurance number and your income in the last tax year – between 6 April and 5 April. Send the completed form and any supporting evidence to Tax Credit Office, Preston, PR1 4AT.

Business expenditure

If a self-employed person buys something for his business that is not a capital asset, he can deduct its full cost when working out his taxable profits.

Typical expenses that can get immediate tax relief for the full amount include business rates and employees’ wages. People who work from home can claim a proportion of costs such as heating, lighting and mortgage interest.

Capital expenditure

An asset that is bought to create or improve a business is capital expenditure. The cost of buying new tools is capital expenditure, but the cost of hiring them isn't. Typical capital expenditure includes work vehicles, computers, furniture and other fixtures.

According to HMRC, ‘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.’ Visit for more information.

Special rules

Some self-employed people – namely, farmers, market gardeners and artists – are able to reduce their tax bill by claiming to average their profits over two years. Self-employed people who have a lodger can claim ‘Rent a Room’ relief, while those who are a foster or adult placement carer do not have to pay tax at all if their income is below a certain level. Businesses that have ceased trading may also get tax relief, known as called 'post-cessation' receipts. Businesses that have made a loss can also get tax relief.