Allowable expenses are the day-to-day costs of running your business that you can deduct from your income before working out the profit you pay tax on. Claim them correctly and you only pay tax on what you actually earned. Claim them wrongly and you risk an HMRC enquiry. This guide covers the main categories for UK sole traders. It is general information, so check GOV.UK or ask an accountant if you are unsure about an item.
The basic rule
An expense is allowable if it is incurred wholly and exclusively for your business. If something is partly personal, you can usually claim only the business share. Keep the evidence: an invoice or receipt and a note of why it was for the business.
Common allowable expenses
- Office costs: stationery, postage, printing, software subscriptions and small equipment.
- Travel: fuel, parking, train and bus fares and hotels for business trips. Normal commuting to your usual place of work is not allowable.
- Staff and subcontractor costs: wages, subcontractors and agency fees.
- Stock and materials: goods you buy to resell or to use in what you make.
- Financial costs: bank and card charges, business insurance and accountancy fees.
- Premises: rent, rates, utilities and property insurance for premises used for the business.
- Advertising and marketing: your website, online advertising, business cards and directory listings.
- Professional fees and training: courses that maintain or update skills you already use in your business.
- Phone and internet: the business share of your bills.
Working from home
If you work from home you have two options. You can claim a share of your real household costs, such as heating, electricity and broadband, based on how much of your home and time is used for work. Or you can use HMRC’s simplified flat rates, which depend on the hours you work from home each month: £10 for 25 to 50 hours, £18 for 51 to 100 hours and £26 for 101 hours or more. The flat rate is easier because you do not have to work out the share of each bill.
Vehicles and mileage
For a car or van you can claim either your actual running costs (fuel, insurance, repairs, and capital allowances on the vehicle) or simplified mileage rates: 45p a mile for the first 10,000 business miles in the tax year and 25p after that. Motorcycles have a lower rate of 24p a mile. Pick one method for each vehicle and keep a log of your business journeys with the date, destination, purpose and miles.
Equipment and capital items
Larger items that last, such as a laptop, machinery or a van, are normally claimed through capital allowances, not as an everyday expense. Often you can deduct the full cost in the year you buy them, but the rules vary by item, so check the current allowances or ask your accountant. Keep the invoices.
What you cannot claim
- Entertaining clients and customers (this includes meals out with clients).
- Fines and penalties, including parking and speeding fines.
- Personal spending, and the personal share of mixed-use costs.
- Clothing, unless it is a uniform or protective gear. Ordinary clothes you could wear anywhere are not allowable.
- Your own wages or drawings. As a sole trader you are taxed on the profit.
The trading allowance alternative
If your gross trading income is small, you may use the £1,000 trading allowance instead of deducting actual expenses. You cannot do both, so the allowance only helps if your real expenses are lower than £1,000.
Keeping records that stand up
Record every cost as it happens, attach the receipt and categorise it. Reconcile your bank statement each month so that nothing slips through. HMRC expects you to keep your records for several years, and with Making Tax Digital for Income Tax you will be reporting income and expenses every quarter. Our guide to Making Tax Digital explains the schedule.
How AvrioBooks helps
Enter costs as bills or direct payments, choose an account for each one, and attach the receipt to the transaction. Bank rules can categorise your regular costs automatically, and your profit and loss report shows your expenses grouped by account, ready to hand to your accountant or use in a quarterly update.
Frequently asked questions
What counts as an allowable expense?
A cost incurred wholly and exclusively for your business, such as office costs, travel, software, insurance and advertising. Mixed-use costs can be claimed only for the business share.
Can I claim working from home costs?
Yes. You can claim a share of real household costs, or use HMRC's simplified flat rates of £10, £18 or £26 a month depending on the hours you work from home.
How much can I claim for mileage?
Using simplified rates for a car or van, 45p a mile for the first 10,000 business miles in the tax year and 25p after that.
What is the trading allowance?
A £1,000 allowance you can use instead of deducting actual expenses if your gross trading income is small. You cannot use it and claim expenses as well.
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