Every pound of legitimate business expenditure you claim reduces your taxable profit and your tax bill. A sole trader claiming £1,000 of expenses at the basic rate saves £200 in income tax. A higher-rate taxpayer saves £400. A limited company typically reduces its corporation tax bill by between £190 and £250, depending on its rate. The rules governing what counts are not complicated at their core, but they are precise. Get them right, and you pay exactly what you owe. Get them wrong, and you either overpay or expose yourself to an HMRC inquiry. This guide explains what qualifies, what does not, and what records you need to defend every claim.
The golden rule: wholly and exclusively
Every allowable business expense must pass the same test. For an expense to be deductible, it must be incurred wholly and exclusively for the trade.
Wholly means the only reason you spent the money was for business. Exclusively means there was no personal element, even a minor one. Where an expense is genuinely mixed, HMRC will deny the whole claim unless you can identify and document a clear business proportion.
The qualification is important. Where a business element is genuinely divisible, you can claim that portion. A phone used 70% for business allows a 70% claim. A room used as a home office can be apportioned against utility bills. Mileage driven to client meetings is claimable at the approved rates. The business element must be real, measurable, and documented.
What apportionment cannot rescue is an inherently personal expense. A working lunch eaten on a normal working day is not claimable, even if business is discussed over it. HMRC’s question is not whether business was one of the reasons, but whether it was the only reason.
Office and premises costs
Rent, business rates, water, heating, electricity, and insurance on dedicated business premises are all allowable in full. Stationery, postage, printing, and consumables are allowable. Software subscriptions used for business purposes qualify, whether for accounting tools, project management platforms, or industry-specific applications.
Working from home
Sole traders can use the simplified expenses, flat rates, or apportion actual costs. The current flat rates are:
You must work at least 25 hours a month from home to use this method. One important caveat: the flat rate does not cover telephone or internet costs. Those must be calculated separately based on actual business use, even where you are using the flat rate for everything else.
If you calculate actual costs instead, you can apportion utilities, council tax, mortgage interest, and broadband based on the number of rooms used for business and the hours spent working there.
Limited company directors cannot use the simplified expenses method. They can claim reimbursement for actual business costs with evidence, or have the company pay a fair market rate as a license to use part of the home as an office.
What HMRC will reject
Buying a property, carrying out major renovations, or making improvements to premises are capital expenditures, not revenue expenses. They cannot be deducted in the year they are incurred. They may qualify for capital allowances instead.
Travel and vehicles
Approved mileage rates
These rates have been unchanged since 2011 and cover all running costs, including fuel, insurance, servicing, and depreciation. If you use the mileage rate, you cannot also claim those costs separately.
Passengers who are employees, carried on a qualifying business journey, attract an additional 5p per mile for the driver.
Self-employed people who use the mileage rate do so under the simplified expenses method. Those claiming actual vehicle costs must instead apportion them based on a business-to-total mileage ratio. Once you choose actual costs for a vehicle, you must continue with that method for its lifetime. You cannot switch to mileage rates mid-vehicle.
What counts as business travel
Travel to a temporary workplace, a client’s premises, between work locations, or to a meeting or training event away from your normal base is business travel. Ordinary commuting between home and a permanent workplace is not.
The 24-month temporary workplace rule applies to many contractors and freelancers: if you expect to be at a location for more than 24 months and for at least 40% of your working time, it becomes a permanent workplace, and travel to and from it is commuting, not business travel.
Train fares, bus fares, and taxis for qualifying journeys are allowable. Hotel costs and subsistence on genuine overnight business trips are allowable, provided you would not have incurred the cost otherwise.
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What HMRC will reject
Commuting to a permanent workplace. Parking fines, road traffic penalties, and any other regulatory fines.
Staff costs
Wages, salaries, bonuses, and employer National Insurance contributions are fully allowable. Employer pension contributions are allowable. Recruitment costs, including advertising and agency fees, are allowable. Benefits provided to employees may be allowable to the employer even where they create a taxable benefit for the employee to report on a P11D.
A sole trader’s own drawings are not an allowable expense. The owner and the business are the same legal entity. Tax is charged on the profit, not on what the owner takes out. A limited company director’s salary is different: it is an expense of the company. It reduces the corporation tax bill, but the director pays income tax and NI on it personally.
Professional and financial costs
Accountancy fees, bookkeeping, legal fees for business matters, professional indemnity insurance, regulatory fees, relevant professional memberships, and trade subscriptions are all allowable.
Bank charges on a business account are allowable. Interest on a business loan is allowable provided it is incurred wholly and exclusively for business purposes. The previous £500 cap on interest deductions under the cash basis has been abolished, and sole traders on the cash basis can now deduct the full amount of allowable business interest, bringing it in line with traditional accounting. The capital repayment element of any loan is not allowable under either method.
Bad debts are allowable only under traditional accounting, where the debt was previously included in turnover and has proved irrecoverable. Under the cash basis, income is recognized only when received, so there is nothing to write off. If bad debts are a material issue for your business, it is worth reviewing which accounting method gives the better result.
Equipment and capital allowances
Equipment, machinery, tools, and vehicles are capital expenditures, not revenue expenses. You do not deduct the full cost, as with a utility bill. Capital allowances provide the relief instead, and there are three main routes currently available.
Annual Investment Allowance provides 100% relief on qualifying plant and machinery in the year of purchase, up to £1 million per accounting period, with the relief permanently confirmed at that level. This covers the vast majority of capital spending for sole traders and small businesses. Cars do not qualify for AIA.
Writing Down Allowances apply to expenditures above the AIA limit, to assets that do not qualify for AIA, or to assets carried over in pools from previous years. The current main pool rate is 14% per year on a reducing-balance basis, down from 18%. The special rate pool covering integral features, long-life assets, and high-emission cars remains at 6%.
The 40% First Year Allowance provides accelerated relief for new main-rate plant and machinery when the AIA is unavailable or not preferred. It is a permanent allowance introduced in the Finance Bill 2025-26 and available to all businesses, including unincorporated businesses. Second-hand assets and cars are excluded. It does not replace the AIA but fills the gap for assets outside its scope, providing faster relief than the writing-down allowance rate.
Accounting depreciation is never an allowable expense for tax. Capital allowances replace it entirely.
Training and professional development
Training that updates or maintains skills for the existing trade is allowable. Training that creates a new skill set, qualifies someone for a different trade, or represents personal development without a direct link to the current business is not considered training. The test is whether the training relates to the existing trade, not a potential future one.
Entertaining: the most commonly misunderstood area
Client entertaining is never allowable.
HMRC’s position is unambiguous: business entertainment of non-employees is not an allowable deduction, even where it is wholly and exclusively for the trade. Taking a client to lunch, providing event tickets, or hosting a dinner is not allowable for income tax and corporation tax purposes. VAT cannot be reclaimed either.
Staff entertaining has its own rules.
Entertaining employees is treated differently and is generally allowable. Where an annual function qualifies under the exemption, there is no benefit-in-kind charge for staff either.
The annual function exemption covers events costing less than £150 per head. If that threshold is exceeded even by £1, the entire cost becomes disallowable, not just the excess. Multiple events per year are permitted, provided the combined per-head cost remains within £150.
Where an event includes both staff and clients, costs must be apportioned. The staff portion may be allowable. The client portion is not.
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Subsistence versus entertaining
A sole trader eating a meal while traveling away from their normal base is incurring subsistence expenses, not entertainment expenses. Subsistence on genuine business travel is allowable. The distinction is simple: if the meal is for you while doing business, it is subsistence. If you are feeding someone else, it is entertaining.
What HMRC will reject: a clear list
Client entertaining disallowable regardless of commercial purpose.
Fines and penalties road traffic fines, HMRC penalties, and regulatory fines are not allowable. They are personal consequences and cannot reduce a tax bill.
Ordinary clothing not allowable even if worn exclusively for work. Protective equipment, branded uniforms, and performance costumes are allowable. Everyday clothing bought for the office is not.
Personal expenditure through the business personal food, holidays, private fuel, or anything primarily serving a personal purpose will be challenged.
Sole trader drawings not an expense of the business.
Depreciation never allowable for tax. Capital allowances replace it.
Non-business payments political donations, personal charitable gifts, and above-market payments to connected parties are all scrutinized.
The £1,000 trading allowance
If total self-employment income is £1,000 or less in a tax year, it is completely exempt from tax and NI, and you may not need to file a return if you have no other reporting obligations. Above that level, you choose between claiming the flat £1,000 allowance or itemizing actual expenses, whichever gives the better outcome. You cannot use both.
Record-keeping
HMRC requires records of all income and expenses for at least five years after the 31 January Self Assessment deadline for the relevant tax year. Records must show what was spent, when, what it was for, and that it was for business. Mileage logs must include date, destination, purpose, and distance. Mixed-use expenses must show the basis of apportionment. Invoices must support equipment purchases.
HMRC can open an inquiry within 12 months of filing for an innocent error, four years where there is a mistake, six years where negligence is suspected, and with no time limit where there is deliberate inaccuracy. Good records are the only reliable protection.
Sole trader versus limited company
The wholly and exclusively rule applies to both. The expense categories are broadly the same. The key differences lie in how costs flow through the accounts and in the tax consequences.
For a sole trader, allowable expenses reduce the profit on which income tax and Class 4 NI are calculated. For a limited company, the profit on which corporation tax is charged is reduced. A director’s salary is deductible for the company but taxable income for the director personally.
Personal expenses put through a limited company that are not genuine business costs become either a director’s loan or a benefit in kind, both of which carry their own tax consequences. Because the company and the individual are legally separate, expenses run through a company face tighter scrutiny than those of a sole trader.
Conclusion
Claiming legitimate business expenses is not tax avoidance. It is how the system is designed to work. The core rule is simple: spend money for a genuine business reason, record it properly, and you can claim it. The problems arise at the edges where personal and business use overlap, where capital and revenue costs are confused, or where records are absent.
Client entertaining, ordinary clothing, commuting, and personal expenditure put through the business are the four categories that most often generate HMRC challenges. Get those right and keep thorough records of everything else, and your expense claims will stand up to scrutiny.
