An allowable expense is a cost that HMRC allows you to claim and deduct from your income to reimburse you personally for that expense. To qualify as an allowable expense, something must be “wholly and exclusively” for the purpose of business or trade, you cannot claim for personal costs.

If a cost includes both business and personal use, whether that’s electricity, a mobile phone or something else, you must use a reliable method to calculate what proportion was for business use and only claim that amount as an allowable expense.

OK, let’s say there are five rooms in your home and you use one as a full-time office, studio or place or work.

• Your electricity bill for the year is £1,000, so you can claim £200 as an allowable expense (£1,000 divided by five, presuming the rooms are of reasonably equal size).
• If you ran a part-time business and used a room in your house as an office two days a week, you could claim £57.14 (ie £200 divided by seven x two) as an allowable expense, in addition to other allowable expenses.

Need to know! If you sell your home, Capital Gains Tax may be payable on the room  in your property if used exclusively for business. To avoid this, it’s best if the room is used for another purpose, for example, a guest bedroom.

You can claim a flat rate amount under simplified expenses, but you can only do so if you work for 25 hours or more a month from home. The flat rate ranges from £10-£26 a month; the more hours you work from home, the more you can claim.

Need to know! The flat rate does not include telephone or broadband expenses, so you can claim the business use proportion of these actual total costs.

If you claim the trading allowance or the property allowance or both (they each enable you to earn £1,000 tax free), you cannot claim allowable expenses as a sole trader or landlord. Be sure to work out the most tax-efficient option for you.

You can still claim allowable expenses for having an office in your home, which you use to administer your sole trader business, whether after hours, at weekends or another time.

You claim via your annual Self Assessment tax return. You tot up and summarise all of your allowable expenses for the tax year, and the total is taken away from your taxable income to find out how much Income Tax (and possibly National Insurance if you’re a sole trader) you owe.

You don’t have to provide HMRC with proof of your expenses when you file your Self Assessment tax return, however, you should keep invoices and sales receipts safe, because HMRC can later request proof. HMRC can also ask to inspect your financial records.

It’s best to regularly enter details of your costs and income in accounting software, then you won’t forget any allowable expenses when you’re completing your Self Assessment tax return. It will also save you lots of time and effort when completing your Self Assessment tax return, as all of your up-to-date allowable expenses will be conveniently summarised.

If you’re in any doubt about what you can claim as allowable expenses when running a sole trader business from your home – find out – as it could save you lots of money. You can do your own online research, contact HRMC’s Self Assessment helpline or pay for tailored guidance from a professional tax adviser. It could save you a lot of money. The same is true if you’re a landlord.

Tax returns can be amended within 12 months of the filing deadline. If you later find out that you’ve claimed for “disallowable expenses” or your allowable expenses are higher than they should be – correct your Self Assessment tax return ASAP.

Thereafter, if HMRC discovers an inaccuracy you’ll have to pay any additional tax due, while penalties can also be charged. These will be higher if you deliberately made a false allowable expense claim and tried to conceal it.