Can I Claim Expenses as a Sole Trader?

Allowable expenses reduce the profit you pay tax on, but only when a cost is genuinely for the business. Here is what qualifies, what does not, and how to keep the records that support a claim.

Summary

• Allowable expenses are business running costs you deduct from income to reach your taxable profit: £40,000 of turnover with £10,000 of expenses means tax on £30,000.
• You can claim the business share of mixed costs, such as the business portion of a phone bill, but never money drawn from the business for personal use.
• Commuting, everyday clothing, parking fines and drawings are not allowable expenses.
• Simplified expenses use flat rates, including 45p per mile for the first 10,000 business miles, but home cost flat rates require at least 25 hours of work from home per month.
• You cannot claim expenses at all if you use the £1,000 tax-free trading allowance instead.

Once you register as self-employed, the costs of running your business can reduce the profit you pay tax on. The rules are generous in places and strict in others: costs that are genuinely for the business usually qualify, while money taken out for yourself never does. This guide answers the questions new sole traders ask most often about expenses.

What counts as an allowable expense?

Allowable expenses are the running costs of your business that you can deduct from your income before working out tax. What is left is called your taxable profit. For example, say your turnover (your total business income before costs) comes to £40,000 and you deduct £10,000 of allowable expenses. Income Tax is then worked out only on the £30,000 that remains.

To qualify, a cost must relate to a business purchase. The categories HMRC lists are:

• office costs, such as stationery and phone bills
• travel costs, such as fuel, parking and train or bus fares
• clothing for the business, such as uniforms
• staff costs, such as salaries or subcontractor payments
• financial costs, for example insurance premiums or charges on a business bank account
• premises costs, for example heating, lighting and business rates
• advertising or marketing, for example the cost of running a website
• training connected to your trade, for example refresher courses

Money you take from the business for personal use, known as drawings, is never an allowable expense, and neither is the personal share of anything you use for both purposes.

One early decision matters. You cannot claim expenses if you use the £1,000 tax-free trading allowance instead. The allowance lets people with small amounts of self-employment income avoid reporting costs altogether, so it suits very modest earnings rather than a growing business. If a cost sits in a grey area, HMRC says to contact it and ask.

Can I claim for working from home?

Yes, for the business share of household costs such as heating, lighting and rent. HMRC asks for a reasonable way to split the bills, such as counting the rooms used for work or the hours you spend working there.

You have two routes. One is to work out the actual business proportion yourself. The other is simplified expenses, covered below, which applies a flat rate based on your recorded hours and needs a minimum of 25 hours of work at home each month. Whichever route you take, the personal part of the bills stays out of the claim.

What about travel, phone and equipment costs?

Business travel counts: fuel, parking, train and bus fares, and meals on overnight business trips. Travel between your home and your normal place of work, known as commuting, does not count. Non-business driving and penalties such as parking fines are out too.

Phone and internet bills can be claimed for the business proportion only. If your mobile bill for the year totals £200, of which £130 covers personal calls and £70 covers business calls, you claim £70.

Equipment depends on how long you will use it and which accounting method you use. Items you would normally use for less than two years, such as some software, are claimed as allowable expenses, and software your business renews regularly counts even if you use it longer. Computers, printers and other equipment you keep for the business can be claimed as allowable expenses if you use cash basis accounting, where income and costs are recorded when money actually moves. Under traditional accounting, which records income and costs when they are earned or incurred, larger purchases such as vehicles are claimed as capital allowances instead. Capital allowances are the way tax relief is given for significant items the business keeps.

Which costs does HMRC not allow?

Anything that is not for the business. The ones that catch people out most often:

• drawings, meaning the money you pay yourself as a sole trader
• ordinary clothes, even ones worn solely while you work; uniforms and similar kit are the exception
• commuting between home and your normal place of business
• personal travel and penalties, such as parking fines
• the personal share of premises, phone or office costs you also use privately

Where an item serves both purposes, only the business share of the cost can go on the return. When in doubt, HMRC will confirm whether a specific cost is allowable.

How do I actually record and claim expenses on my return?

You claim them when you file your Self Assessment return, the annual report of your income and costs sent to HMRC. Add up each category of allowable expense and enter the totals in the self-employment section alongside your business income. The figures should come from records rather than memory or estimates. If you have not filed before, our walkthrough of how to file your first Self Assessment tax return takes you through each part of the form. Not sure whether a cost is allowable? Contact HMRC before you submit rather than guessing.

What records do I need to keep, and for how long?

HMRC expects records that support every figure on the return. In practice:

• receipts and invoices for business purchases
• bank statements covering the year
• a log of business miles if you use flat-rate vehicle expenses
• a note of hours worked at home if you claim the flat rate for home costs
• phone, utility and insurance bills where you claim a business proportion

The length of time you must keep records is set by HMRC and depends on your circumstances, so check GOV.UK before disposing of anything. Keeping the paperwork in one place as you go is far easier than rebuilding a year of purchases at filing time.

Do simplified expenses make this easier?

Simplified expenses are flat rates set by HMRC that replace the job of working out some actual costs. They are available to sole traders and to partnerships that do not include a limited company; limited companies cannot use them.

For vehicles, you claim a flat rate per business mile instead of adding up fuel, servicing, insurance and the rest: a flat 45p for each of the first 10,000 business miles, falling to 25p for every mile beyond that. Motorcycles are 24p per mile and bicycles 20p. Once you use the flat rate for a vehicle, you must carry on with it for as long as the business uses that vehicle, although you can use actual costs for a different one.

For working from home, the flat rate applies from 25 hours of work at home per month and rises with the hours you record, so keep a monthly log. Phone and internet are not included in the rate and can be claimed separately as actual business costs. If you live at your business premises, for example running a bed and breakfast, simplified expenses can also be used to divide the costs.

Flat rates trade precision for simplicity. It still makes sense to work out your actual costs as well, so you can see which method gives the larger claim before you choose.

Next steps

• Sole Trader or Limited Company? What Changes for Your Tax: how your business structure changes what you can claim and how you pay tax.
• Before You Register as Self-Employed With HMRC: what to sort out before registration, so your record keeping starts clean.
• How to File Your First Self Assessment Tax Return: where the expense totals you have gathered actually go.

Questions readers ask