The coronavirus pandemic has meant many more of us have experienced working from home in recent years, but it’s nothing new for many self-employed people (i.e. sole traders) who run home-based businesses.

When you’re a sole trader running a home-based business, you need to claim your full allowable expenses, as it will minimise your Income Tax bill.

Allowable Expenses You Can Claim

If you make less than £1,000 in a year and don’t pay tax because you use your trading allowance, you cannot claim any allowable expenses.

If you earn more than £1,000, you can minimise you tax bill by claiming business costs as “allowable expenses” in your annual Self-Assessment tax return.

Such allowable expenses must be generated “wholly and exclusively” for business purposes. Personal expenses are not allowable.

If you use something for business and personal reasons (e.g., your mobile phone), you can only claim allowable expenses for business use.

Even if you mostly operate remotely, for example, by delivering a service at customers’ homes, you can still claim allowable expenses for having an office in your home.

As you might expect, you can claim for business use of your landline telephone and broadband. You can also claim for business stationery.

You can claim for an appropriate proportion of your domestic electricity and heating bills when running a business from your home.

You can also claim for some of your water rates, based on business use. If you use a lot of water for your home-based business, you’re advised to get a separate bill from your water supplier, so you can claim the full amount.

If you’re paying a mortgage on your home, you can claim a proportion of your mortgage interest payments – not the mortgage capital repayment.

If you’re paying rent to a landlord, you can claim a fitting proportion. Sole traders who own or are buying their own home with a mortgage cannot rent a room to their business.

Some Council Tax can be claimed if you use a small part of your home for your business. Business rates are payable if, for example, you sell products or services to visitors to your property, or you’ve converted your garage into a gym for paying customers.

You can claim for full repairs to the room in which you run your business, as well as a proportion of “whole-house” repairs (e.g. if you have your roof fixed). You can’t claim anything for having a bathroom or kitchen repaired.

Working Out Your Allowable Expenses

You can work out your allowable expenses as a home-based sole trader business either by finding out the actual or estimated cost of each allowable expense or using simplified expenses to claim a flat rate.

Finding out some allowable expenses is easy, if you have a receipt, invoice or credit card/bank account statement. In other cases, you’ll have to make informed estimates.

If you use something for work and business, for example, your mobile phone, you must work out your business use.

For example: If your yearly bill for mobile phone calls is £240 and you use your phone for business roughly a third of the time, you can claim £80 as an allowable expense. If business calls make up about half of your total use, you can claim £120 as an allowable expense.

For utility bills, people usually claim allowable expenses for use of one room for business. So, if you live in a house with five rooms and one is set up as an office, you would claim for a fifth of each bill.

For example: If your total electricity is £600 for the year, you could claim £120 as an allowable expense. If your yearly Council Tax bill is £1,800, you may claim an allowable expense of £360.

Your other option is to use a flat rate to calculate your simplified allowable expenses, which can save time and effort. However, you should work out whether claiming a flat rate covers your actual business expenses.

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

You can only use simplified expenses if you work 25 hours or more a month from home. These are the rates:

 - If you work between 25 and 50 hours a month, you can claim a flat rate of £10 per month (£120 a year).

 - If you work between 51 and 100 hours a month, you can claim a flat rate of £18 per month (£216 a year).

 - If you work 101 hours or more a month, you can claim a flat rate of £26 per month (£312 a year).

Government website GOV.UK features a simplified expenses checker so you can compare what you can claim using simplified expenses against actual costs.

Get in touch if you’re in any doubt about what you can claim as allowable expenses when running a sole trader business from your home.