Allowable expenses for the self-employed
Your tax is charged on profit, not turnover, so every legitimate business cost you claim lowers the income that gets taxed, and lowers your Class 4 National Insurance too. Under-claiming is one of the most common ways sole traders overpay. Here's what counts, and how to think about the grey areas.
The one rule that matters
An expense is allowable if it's incurred wholly and exclusively for the business. That's the whole test. A cost that's purely business (stock, business insurance, an accountant's fee) is fully allowable. A cost that's part business and part personal needs to be split, and you can only claim the business share.
The main categories
- Office and premises: rent, business rates, utilities, and a reasonable proportion of home costs if you work from home.
- Stock and materials: goods for resale, raw materials, direct costs of what you sell.
- Travel: business mileage, train and bus fares, parking, and accommodation on business trips. Not your ordinary commute.
- Equipment and tools: laptops, phones, machinery, software subscriptions.
- Professional costs: accountancy, legal fees, professional memberships, business insurance.
- Marketing: website, advertising, business cards.
- Staff costs: wages, subcontractor payments, pension contributions for employees.
- Financial costs: bank charges on a business account, interest on business loans.
Working from home
If you work from home, you can claim a share of your household running costs (heating, electricity, broadband, council tax) based on how much of your home and time is used for work. You can either work out the actual proportion or use HMRC's simplified flat rate, which pays a set monthly amount based on the hours you work from home. The flat rate is less paperwork; the actual-cost method sometimes gives a bigger claim. Pick whichever suits you and keep it consistent.
Cars and mileage
For vehicles, the simplest approach is the mileage method: a flat rate per business mile (45p for the first 10,000 miles, 25p after that, for cars). That rate is meant to cover fuel, servicing, insurance and wear. Alternatively you can claim the actual business proportion of your real running costs, but you can't mix the two methods for the same vehicle, so choose early.
What you can't claim
- Ordinary commuting from home to a regular workplace.
- Everyday clothing, even if you only wear it for work (uniforms and protective gear are fine).
- Client entertaining.
- Fines and penalties.
- The personal share of any mixed-use cost.
The trading allowance
If your self-employment income is very small, the £1,000 trading allowance can be simpler than claiming expenses: you deduct a flat £1,000 instead of your actual costs. It only helps if your real expenses are under £1,000, but for a small side income it saves a lot of bother.
See the effect on your tax
Because expenses reduce your profit, they reduce both Income Tax and Class 4 National Insurance. To see how much a change in profit moves your bill, put two figures into the estimator and compare. It's a good way to appreciate why that box of receipts is worth keeping. For more ways to lower the bill, see how to reduce your Self Assessment tax bill.