Sophie Clarke
Why allowable expenses are worth getting right
Every pound you spend on genuine business costs is a pound that doesn't get taxed. That's the simple promise behind allowable expenses, and for most small businesses it's the single easiest way to keep your tax bill fair. Whether you're a sole trader filling in a Self Assessment return or a limited company director preparing accounts, the principle is the same: costs incurred wholly and exclusively for the purposes of your trade can normally be deducted from your taxable profit.
Where people go wrong isn't usually dishonesty — it's uncertainty. Receipts get stuffed in a drawer, personal spending gets muddled with business spending, and perfectly legitimate costs are quietly forgotten because nobody was sure whether they counted. This guide walks through the practical rules, the common claims, and the grey areas worth a conversation.
The golden rule: wholly and exclusively
HMRC's test is that an expense must be wholly and exclusively for the purposes of the business. If something serves both your business and your personal life, you can usually only claim the business proportion. A phone contract used mainly for work calls, for example, might be claimed at 70 or 80 per cent — but you need to be able to justify that figure.
There's also a distinction between revenue and capital expenses. Day-to-day running costs are revenue expenses and reduce your profit in the year you incur them. Big-ticket purchases like equipment, vehicles or significant IT kit are capital, and are claimed differently — often through capital allowances, which spread or accelerate the relief. Knowing which is which matters, because claiming a laptop in the wrong place can complicate your accounts unnecessarily.
Everyday costs most people can claim
The bread-and-butter expenses of running a business are almost always allowable. If you're unsure whether something belongs on your list, ask whether you'd have bought it if the business didn't exist.
- Stationery and postage — paper, ink, envelopes, courier fees, business cards.
- Software and subscriptions — accounting tools, design packages, cloud storage, hosting, and the professional bodies you're required to belong to.
- Insurance — public liability, professional indemnity, employer's liability, contents cover for a home office or workshop.
- Professional fees — accountancy, bookkeeping, legal advice on contracts, and payroll services.
- Marketing — website costs, printing, advertising spend, and paid social campaigns.
- Bank and finance charges — business account fees, card processing charges, and interest on business borrowing.
- Training — courses that update or maintain skills you already use in the business (new skills for a brand-new trade are trickier).
- Travel and accommodation — rail fares, flights, parking, and overnight stays for genuine business trips.
Use of home, mileage and the flat-rate options
Two of the most common claims also cause the most confusion, so it's worth knowing the simplified routes.
For working from home, you can either claim a reasonable proportion of actual costs — gas, electricity, broadband, council tax element — based on how much of the home and how much of the time it's used for business, or you can use HMRC's flat rate. The flat rate starts at £6 a week for 25 to 50 hours a month and rises in bands, and it requires far less paperwork. Many sole traders find it the easier choice.
For vehicles, the simplest approach is mileage allowance: 45p per mile for the first 10,000 business miles in a tax year, then 25p thereafter, plus a small additional rate for passengers. Keep a mileage log as you go. If you drive an electric or hybrid company car, the benefit-in-kind rules are more generous than they once were, but they're worth checking with your accountant before you commit.
Where expenses get tricky
Some categories trip people up year after year.
- Client entertaining is not allowable — lunches, event tickets and hospitality for customers are specifically excluded.
- Staff entertaining is different. An annual party costing up to £150 per head, including VAT, is generally exempt from tax and reporting.
- Clothing is only allowable if it's protective, a uniform, or genuinely part of the trade — ordinary smart clothes aren't.
- Trivial benefits for employees, such as a small gift under £50, can be tax-free if they meet the conditions.
- Personal elements must be stripped out. If a trip mixes a holiday with a client meeting, only the business portion counts.
If you use the £1,000 trading allowance, you can't also claim expenses — it's one route or the other, and for low-cost, high-turnover trades the allowance often wins. Run the numbers both ways.
Keep records that hold up
Good records are the difference between a claim you can defend and a claim you have to abandon. Keep receipts, invoices and bank statements for at least six years after the 31 January filing deadline, and note the business purpose on anything ambiguous. Digital copies are fine, and photographing a paper receipt on the day is far easier than reconstructing a year in January.
A separate business bank account — even a basic one — saves hours of sorting and makes mixed-use spending obvious. Tag expenses as you go, and reconcile monthly rather than annually.
When to ask for a hand
Most small business owners can handle the basics. Where an accountant earns their fee is in the margins: capital allowances versus annual investment allowance, the most tax-efficient way to pay yourself, whether a cost is capital or revenue, and how a change in your business structure affects what you can claim. If you're ever unsure, ask before you file. A ten-minute conversation is far cheaper than correcting a return later.
