Why Understanding Allowable Expenses is Crucial for Your Profitability
For any self-employed professional, freelancer, or small business owner in the UK, mastering the concept of ‘allowable expenses’ is not just good practice but it’s the single most effective way to legally reduce your tax bill. A common source of anxiety for sole traders is the fear of misclaiming expenses and triggering an audit from HM Revenue and Customs (HMRC). This often leads to under-claiming, meaning you pay more tax than you need to.
This guide is designed to build your confidence. It will provide a clear framework, backed by official HMRC guidance, to help you identify and claim every legitimate business expense you are entitled to.
The principle is simple. You pay tax on your profits, not your turnover. The formula for your taxable profit is:
Taxable Profit= Total Business Income (Turnover) – Allowable Business Expenses
For example, if your business has a turnover of £40,000 and you claim £10,000 in allowable expenses, you only pay Income Tax and National Insurance on a taxable profit of £30,000. Understanding and meticulously tracking these expenses is fundamental to your financial health.
The Golden Rule: “Wholly and Exclusively” for Business Purposes
Before claiming any expense, you must be able to satisfy HMRC’s golden rule: the cost must be “wholly and exclusively” for the purposes of your trade or business. This means the expense was incurred solely for running your business.
This is straightforward for costs like stock or business-only insurance. However, it becomes more complex for dual-use expenses, that is, items or services you use for both business and personal reasons, such as your mobile phone or home internet. In these cases, you cannot claim the full cost. Instead, you must apportion it and claim only the business-use portion.
To do this, you need a logical and reasonable method for dividing the cost. For example, if your total mobile phone bill for the year is £200, and you calculate that £70 of that was for business calls, you can claim £70 as an allowable expense. This principle of apportionment is key to unlocking many legitimate claims that are often overlooked.
Claiming Allowable Expenses for Your Workspace: Office, Premises, and Working From Home
Where you work generates significant costs, many of which are tax-deductible.
Dedicated Business Premises
If you rent a dedicated commercial space like an office, studio, or workshop, you can claim a wide range of running costs. These include:
- Rent for the property
- Utility bills (electricity, gas, water)
- Business rates
- Property insurance
- Security costs
- Maintenance and repairs.
It is important to note that you cannot claim the purchase cost of a property as a business expense. Instead, you may be able to claim tax relief through Capital Allowances, which is a separate system for larger asset purchases.
The Home Office: Allowable Expenses You Can Legitimately Claim
Working from home is a major source of confusion when it comes to expenses. HMRC provides two distinct methods for claiming relief on your household costs.
Method 1: Actual Costs (The Apportionment Method)
This method involves calculating the proportion of your home’s running costs that are attributable to your business. You can claim a fraction of bills such as:
- Heating and electricity
- Council Tax
- Mortgage interest (not the capital repayment) or rent
- Internet and telephone use.
You need a reasonable method to work out the business proportion. A common approach is to base it on the number of rooms used for business. For example, if your home has four rooms and you use one exclusively as an office, you could claim 25% of your electricity and heating bills as a business expense.
Method 2: Simplified Expenses (The Flat Rate Method)
For many, calculating the exact business proportion of household bills is time-consuming. To address this, HMRC offers a simplified flat-rate system. If you work from home for 25 hours or more a month, you can claim a set monthly amount instead of calculating a portion of your actual bills.
| Hours Worked from Home per Month | Flat Rate per Month |
| 25 to 50 hours | £10 |
| 51 to 100 hours | £18 |
| 101 hours or more | £26 |
Source: (https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home)
This method is much simpler, but if you have high utility costs or a large dedicated workspace, calculating actual costs may result in a larger deduction. You can use HMRC’s simplified expenses checker to compare the two methods.
On the Move: Claiming Travel and Vehicle Expenses
Travel costs are a significant expense for many self-employed individuals, but the rules are strict.
Business Journeys vs. Commuting
The most critical distinction is between an allowable business journey and non-allowable commuting. You can claim for travel between different workplaces (e.g., visiting clients or suppliers), but you cannot claim for the journey between your home and your permanent place of work.
Allowable travel expenses include:
- Public transport fares (train, bus, air, taxi)
- Hotel accommodation on overnight business trips
- Meals and subsistence on overnight business trips.
Using Your Own Vehicle: Mileage vs. Actual Costs
If you use your own car, van, or motorcycle for business, you have two options for claiming expenses.
Method 1: Simplified Mileage Allowance
This is the most popular and straightforward method. You keep a log of your business mileage and claim a flat rate per mile. This rate is designed to cover all vehicle running costs, including fuel, insurance, servicing, and depreciation.
| Vehicle Type | First 10,000 Business Miles | Over 10,000 Business Miles |
| Cars and goods vehicles | 45p per mile | 25p per mile |
| Motorcycles | 24p per mile | 24p per mile |
Source:(https://www.gov.uk/expenses-if-youre-self-employed/travel)
Method 2: Actual Vehicle Costs
Alternatively, you can claim the actual costs of running your vehicle. This includes expenses like:
- Fuel
- Vehicle insurance
- Repairs and servicing
- Breakdown cover.
If you use this method, you must calculate the proportion of these costs that relates to business use and claim only that amount. You may also be able to claim Capital Allowances on the purchase price of the vehicle, which is not possible if you use the mileage allowance method.
Essential Overheads: Office, Staff, and Marketing Costs
The day-to-day costs of running your business are also deductible.
Office Equipment and Stationery
You can claim for a wide range of office supplies, including:
- Stationery (pens, paper, envelopes)
- Postage
- Printing and ink cartridges.
For computer software, the rules depend on its expected lifespan. If you use it for less than two years or pay for it via a recurring subscription, you can claim it as a business expense. If it is expected to last longer, it should be treated as a capital asset and claimed through capital allowances.
Staff and Subcontractor Costs
If you employ people, you can claim for the costs associated with their employment, such as:
- Salaries and bonuses
- Employer’s National Insurance contributions
- Pension contributions
- Agency fees
- Costs of subcontractors.
However, you cannot claim for costs related to domestic help, such as a nanny or cleaner for your home, even if this helps you to work more hours.
Marketing and Subscriptions
The costs of promoting your business are generally allowable. This includes:
- Website hosting and maintenance
- Newspaper or online advertising
- Mailshots and directory listings.
A crucial point to remember is that you cannot claim for client entertainment. Taking a potential client for lunch is considered ‘entertaining’ by HMRC and is not a deductible expense, even if it is a genuine marketing activity.
You can, however, claim for subscriptions to professional organisations or trade bodies that are relevant to your business, as well as subscriptions to trade journals.
Other Key Expense Categories You Shouldn’t Overlook
Beyond the main categories, there are several other important areas where you can claim expenses.
Legal and Financial Costs
You can claim for professional fees paid for business purposes, including fees for:
- Accountants
- Solicitors
- Surveyors and architects.
You can also claim for business bank charges, interest on business loans, and the cost of business insurance policies, such as professional indemnity or public liability insurance.
Stock and Materials
If your business involves selling goods, you can claim the cost of the stock or raw materials you buy to make products for resale.
Clothing Expenses
This is a common area of confusion. You can claim for:
- A uniform specific to your work.
- Protective clothing required for your job (e.g., steel-toe boots).
- Costumes for actors or entertainers.
You cannot claim for everyday clothing, even if you wear it exclusively for work. A business suit, for example, is not an allowable expense because it could theoretically be worn for personal use.
Business-Related Training
You can claim for training courses that are intended to update your existing skills and expertise. For example, a web developer attending a course on a new programming language could claim the cost. However, you cannot claim for training that teaches you a new skill to expand into a new area of business.
Record Keeping: The Foundation of Every Expense Claim
The administrative burden of maintaining good financial records is a significant challenge for many self-employed individuals. However, it is the most critical part of claiming expenses. While you do not need to send proof of your expenses with your tax return, you must keep records to show HMRC if they ask.
You must keep your records for at least 5 years after the 31 January submission deadline for the relevant tax year. Acceptable proof includes:
- Receipts for payments
- Invoices (sales and purchases)
- Bank and credit card statements
- Mileage logs for vehicle use
- Contracts and email correspondence.
Positioning good record-keeping not as a chore but as a strategy for maximising claims and achieving peace of mind can transform your approach to tax. Using accounting software or even simple receipt-scanning apps can make this process far more manageable.
Conclusion: Claiming with Confidence
Claiming allowable expenses is your right as a self-employed individual and a key part of running a financially healthy business. By understanding the “wholly and exclusively” rule, knowing the different methods for claiming home and vehicle costs, and committing to diligent record-keeping, you can approach your Self Assessment with confidence. Be thorough, be honest, and ensure you are not paying a penny more in tax than you legally owe.
FAQ’S: Allowable Expenses for the UK Self-Employed
1. What are allowable expenses for the self-employed?
Allowable expenses are the day-to-day running costs of your business that you can deduct from your income to work out your taxable profit. These reduce the amount of Income Tax you need to pay.
2. Who can claim allowable expenses?
Anyone who is self-employed, including sole traders and business partners, can claim allowable expenses when completing their Self Assessment tax return.
3. What’s the difference between allowable and disallowable expenses?
Allowable expenses are costs that are wholly and exclusively for business purposes. Disallowable expenses are personal costs or mixed-use costs without clear business justification, such as clothes (unless it’s a uniform or protective gear) or client entertainment.
4. Can I claim for working from home?
Yes. You can claim a proportion of your home expenses (like rent, utilities, and internet) based on how much you use your home for work, or use HMRC’s simplified flat rate system.
5. Can I claim mileage or vehicle expenses?
Yes. You can either claim:
Actual vehicle costs (fuel, maintenance, insurance, etc., proportioned for business use), or
HMRC’s flat-rate mileage allowance (e.g., 45p per mile for the first 10,000 miles).
You must choose one method and stick with it for each vehicle.
6. What if I use something for both personal and business use?
You can claim the proportion used for business. For example, if your mobile phone is used 60% for business and 40% personal, only 60% of the bill is allowable.
7. Can I claim for food and drink?
Only in specific business circumstances. You can claim meals when you’re travelling for business or working away from your usual base temporarily—but not for everyday lunches eaten while working from home.
8. Can I claim for training or courses?
Yes, but only if the training is to maintain or update existing skills relevant to your current business. Courses to learn new skills or change careers are not allowable.
9. Do I need to keep receipts and records?
Absolutely. You must keep records of all business expenses and receipts for at least 5 years after the 31 January submission deadline for that tax year. HMRC may ask to see them.
10. What are some commonly claimed allowable expenses?
Office costs (stationery, phone bills)
Travel costs (fuel, train fares, parking)
Stock or raw materials
Insurance and bank charges
Marketing and advertising
Professional fees (accountants, legal advice)
Subscriptions and memberships (if related to your trade)
11. Can I claim for a business loan or credit card interest?
Yes, interest on business-related loans or credit cards is allowable, but only if the borrowing is wholly and exclusively for business purposes.
12. What happens if I claim something I shouldn’t?
HMRC can fine or penalise you if you claim disallowable expenses. They may investigate your return, issue corrections, and charge interest or penalties.
13. What if I make a mistake on my tax return?
You can amend your return within 12 months of the 31 January deadline following the end of the tax year. After that, you’ll need to contact HMRC directly.
14. How do I claim allowable expenses on my Self Assessment?
You include them in the “Self-employment” section of your tax return, either by itemising them or entering a total amount if using simplified reporting.
15. Should I use an accountant?
It’s not mandatory, but a qualified accountant can help you maximise your expenses claim and avoid costly mistakes.