Why getting expenses right pays you twice

Every allowable expense you claim reduces your taxable profit, and a smaller profit means a smaller Self Assessment bill. If you pay tax at the basic rate, £100 of legitimate business costs saves you roughly £20 in income tax plus around £6 in Class 4 National Insurance. Let £2,000 of receipts pile up in a drawer unclaimed and you have effectively made a voluntary donation of several hundred pounds to HMRC.

The flip side matters just as much. Claiming things you should not, or claiming them without evidence, can lead to an enquiry, penalties and interest. The goal is simple: claim everything you are entitled to, and be able to prove it.

What counts as allowable: the "wholly and exclusively" test

HMRC's starting point is that an expense must be incurred wholly and exclusively for the purposes of your trade. In everyday terms, that means the ordinary costs of running your business. Common examples include:

• Office supplies, stationery, printing and postage
• Tools, equipment, machinery and computer hardware
• Business insurance, professional memberships and trade subscriptions
• Accountancy fees, legal fees and business bank charges
• Advertising, website hosting, domain names and marketing
• Phone and broadband, claimed at the business-use percentage
• Software and subscription services you use for work
• Stock, raw materials and packaging
• Subcontractor and freelancer payments
• Safety gear, protective clothing and uniforms carrying a business logo
• Training that updates skills you already use in your current trade
• Travel to clients, suppliers and temporary sites in the course of the work

Larger items such as a van, a laptop or a set of tools can usually be claimed in full in the year you buy them through the Annual Investment Allowance, or deducted under the cash basis if you use it.

Simplified expenses: less maths, still legitimate

You do not have to add up every fuel receipt or argue over a percentage of your electricity bill. HMRC offers flat rates for the fiddliest costs.

• Mileage: 45p per mile for the first 10,000 miles in a car or van, then 25p. Motorcycles are 24p and bicycles 20p. These rates include running costs, so you cannot also claim fuel, servicing or insurance for the same vehicle.
• Working from home: £10 a month if you work 25 to 50 hours from home, £18 for 51 to 100 hours, and £26 for 101 hours or more. This covers heating, lighting and broadband, and avoids a paper trail of utility bills.
• Living at your business premises: £350 a month for one person, £500 for two, £650 for three or more, covering bills such as council tax, water and mortgage interest.

Alternatively, you can use the £1,000 trading allowance instead of claiming any expenses. For most sole traders with real costs, claiming the actual figures is worth considerably more.

The grey areas that catch people out

Some costs feel business-related but are not deductible, and getting this wrong is one of the most common reasons for an awkward letter from HMRC.

• Ordinary clothing is not allowable. A suit you also wear at weekends is personal. A branded polo shirt or steel-capped boots bought for the job are fine.
• Client entertaining is not allowable. Neither are client gifts, however generous the intention.
• Commuting does not count. Travel from home to a permanent workplace is ordinary commuting. Travel between two client sites, or to a temporary site, normally is allowable.
• Mixed-use items need honest apportionment. If your phone is 60% business, claim 60%. Guesswork in your own favour tends not to survive scrutiny.
• Training for a brand-new trade is not allowable. A bookkeeper learning marketing to win more clients is fine; a plumber retraining as a web designer is not.
• Personal spending run through the business account is not an expense — it is a drawing, and should be recorded as such.

Keeping records that hold up

You must keep business records for at least five years after the 31 January filing deadline for the relevant tax year. For the 2024/25 tax year, that means keeping everything until 31 January 2031.

Good habits make the whole thing painless. Open a separate business bank account so personal and business spending never blur. Photograph paper receipts the moment you get them and store them in a folder by month. Keep a simple mileage log noting date, destination, purpose and miles. Record expenses in a spreadsheet or bookkeeping app weekly rather than in a frantic January rush.

Digital records are becoming essential rather than optional. Making Tax Digital for Income Tax requires sole traders with turnover above £50,000 to keep digital records and file through compatible software from April 2026, with the threshold dropping to £30,000 the following April. Starting now means no scramble later.

If you are newly self-employed, remember to register for Self Assessment by 5 October following the end of your first tax year. And when a cost sits in a grey area, ask your accountant before you claim it — a two-minute question is far cheaper than a penalty.