A business has various running costs – some of which are allowable expenses that can be deducted to work out your taxable profit. For instance, if your turnover is £100,000 and you claim £30,000 in allowable expenses, you will only pay tax on the remaining £70,000. This is known as your taxable profit.
What allowable expenses do not include?
Please note, however, that allowable expenses do not include money taken from your business to pay for private purchases. Additionally, different rules may need to be followed in case you run your own limited company. While business costs can be deducted from your profits before tax, any item being used for personal use must be reported as a company benefit.
Which costs can be claimed as allowable expenses?
You can claim the following costs as allowable expenses:
- Staff costs: e.g. salaries or subcontractor costs
- Office costs: e.g. phone bills or stationery
- Travel costs: e.g. fuel, bus/train fares, parking
- Busines premises costs: e.g. lighting, heating, business rates
- Financial costs: e.g. insurance, bank charges
- Marketing and advertising costs: e.g. website costs
- Clothing costs: e.g. uniforms
- Training courses costs: e.g. refresher courses
- Purchase costs: e.g. raw materials, stock
It may be pertinent to mention that you cannot claim expenses if you use your £1,000 tax-free ‘trading allowance’. In case you are not sure whether a business cost is an allowable expense, you can contact the Self-Assessment helpline here.
Which costs can be claimed as capital allowances?
If you use traditional accounting, you can claim capital allowance when buying something you wish to keep using in your business. For instance, machinery, equipment, business vehicles e.g. cars, vans, lorries. Again, you cannot claim capital allowances if you use your £1,000 tax-free ‘trading allowance’.
However, if you use cash-basis accounting, you can claim a capital allowance if you buy a car for your business. All other items bought and kept for your business should be claimed in the normal manner.
What can you claim if you use something for both business and personal reasons?
In such cases, you can only claim allowable expenses for business costs. For instance, your mobile phone bills for the year total £300. Of this, you spend £200 on personal calls and £100 on business. You can claim £100 of business expenses.
What can you claim if you are working from home?
In such cases, you may be able to claim a proportion of your costs for items like:
- Heating costs
- Internet and telephone use
- Mortgage interest or rent
- Council Tax
However, please note that you will need to find a reasonable method of dividing your costs – either by the number of rooms you use for business or the amount of time you spend working from home.
The following example helps demonstrates this:
Assume you have 5 rooms in your home – only one of which you use as an office. Your electricity bill for the year is £500. Assuming all the rooms in your home use equal amounts of electricity, you can claim £100 as allowable expenses. If you worked only one day a week from home, you could claim £14.29 as allowable expenses (£100 divided by 7).
What are simplified expenses and what are they used for?
Simplified expenses are flat rates that can be used if you wish to avoid complex calculations to work out your business expenses.
They can be used for:
- Working from home
- Living on your business premises
How can you calculate allowable expenses if you work from home?
A flat rate can be used to calculate your allowable expenses based on the hours you work from home each month. As a result, you do not have to calculate the proportion of personal and business use for your home. It is important to note, however, that the flat rate does not include telephone or internet expenses. And you can claim the business proportion of these bills by working out the actual costs. Also, you can only use simplified expenses if you work for 25 hours or more a month from home.
The following table shows the applicable flat rates:
|Hours of business use per month||Flat rate per month|
|25 to 50||£10|
|51 to 100||£18|
|101 and more||£26|
You worked 50 hours from home for 9 months but worked 60 hours during 3 months.
9 months x £10 = £90
3 months x £18 = £54
Total you can claim = £144
You can also use the simplified expenses checker to compare what can be claimed using simplified expenses with what you can claim by working out the actual costs.
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