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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

Pre-trading expenses

On this page, we discuss expenses you might incur before you start trading and how you go about claiming tax relief for them.

Content on this page:

Starting self-employment

Pre-trade expenses are those that you pay out before you start trading. Generally, trade cannot commence until you are:

  • in a position to supply the goods and services that your business will provide (for example you have bought some stock), and
  • you do provide, or offer to provide, the goods and services to your customers.

However, to get to the point of being able to start trading you are likely to have spent money on things necessary for your business, such as buying equipment, buying stock, paying rent for premises, getting insurance, and advertising. These expenses are likely to be pre-trade expenses.

Pre-trade expenses can also include items that you owned privately that you will now use in your business. There is an example showing how you can include equipment that you have pre-owned privately in your accounts and self assessment tax return in the case study (on page 33) in our Self-employment guide.

Pre-trade expenses, as with other expenses, can either be revenue expenses that are deductible when working out your profit or capital expenditure. You can read about the difference between revenue and capital expenditure if you are not sure.

Claiming for pre-trading expenses

If the expenses were incurred within seven years of you starting to trade, and the expenses would have been tax-deductible if you had incurred them while you were trading, then you can treat them as if they were incurred on your first day of trading. This means you can claim them in addition to the other business expenses relating to the first period of trading.

Example: Brian

Brian starts trading as an electrician on 1 June 2023. He had 500 leaflets printed to advertise his services in March 2023. The cost of these leaflets will be treated as a separate pre-trade deduction from his profits in the first accounting period. This is because such advertising costs would normally be deducted from his trading profits had he paid for them after he started trading, and they were incurred no more than seven years before the trade commenced.

Example: Amelia

Amelia starts her business running a coffee shop on 1 August 2023. She had to pay legal costs in July 2023 in connection with signing a 99-year lease for the shop. She will not be able to claim the legal costs as pre-trade expenses for income tax purposes, because such expenses would not normally be deducted from trading profits. This is because they are capital costs related to land and property. See below under the heading Capital costs, where we discuss how you might be able to get relief for items that fall within the definition of ‘plant and machinery’.

Capital costs

If you incur capital expenditure on items of plant and machinery that will be used in your trade, before trading starts, the expenses are treated as being incurred on your first day of trading. The tax treatment of these capital costs will depend if you are using the accruals basis or cash basis to prepare your accounts. If you are using the cash basis, then you may be able to claim these as a business expense. If you are using the accruals basis, you may be able to claim capital allowances.

Example: Giovanni

Giovanni buys shelving for his florist shop on 3 March 2023, but does not start trading until 1 May 2023. He will be treated as buying the shelving on 1 May 2022 and can claim capital allowances on the cost of the shelving (as long as he has not elected to use the cash basis). If Giovanni has elected to use the cash basis, then the cost of the shelving is treated as incurred on 1 May 2023 and Giovanni can claim the cost as a business expense.

Losses

If, after deducting pre-trading expenses your accounts show a loss, you should be able to get loss relief. Our guidance covers this on our trading losses page.

More information

Our guide to self-employment is intended to supplement the material in this section. We wrote this guide to help non-tax advisers who help low-income self-employed individuals, and for self-employed people who want more detailed information in one place. The guide explains the less common tax rules and contains more detailed information, including a case study showing how to prepare accounts, what to include on your 2022/23 tax return, how to treat pre-trade expenses and how to use the cash basis.

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