Claim business expenses as a sole trader

As a sole trader, you can reduce your taxable profit by claiming allowable business expenses. This directly lowers your Income Tax and Class 4 National Insurance bill.

You have two choices for claiming expenses:

• track and claim the actual costs you incur
• use HMRC's simplified expenses flat rates for vehicles, working from home or living at business premises

For most expenses, you must use actual costs. Simplified expenses only apply to specific categories.

Trading allowance: an alternative to expenses

If your total business income is low, you may be better off using the trading allowance instead of claiming expenses.

If your actual business expenses are less than £1,000, the trading allowance gives you a better tax position. If your expenses exceed £1,000, claim actual expenses instead.

You cannot use the trading allowance if you receive income from a company you or a family member control, or from an employer or former employer.

The golden rule: wholly and exclusively

Expenses must be incurred wholly and exclusively for your business to be allowable. HMRC applies this test strictly. The whole expense must relate to your business, and it must have no personal benefit.

If an item has both business and personal use (like your mobile phone), you must apportion the cost and only claim the business portion.

Allowable expense categories

These are the main categories of expenses you can claim:

Expenses you cannot claim

Some costs are never allowable, even if they seem business-related:

Simplified expenses

HMRC offers flat-rate allowances for three types of expenses. These can simplify your record-keeping, but may not always give the highest deduction.

Simplified expenses may suit you if:

• You want simpler record-keeping
• Your actual costs are difficult to calculate
• The flat rates give you a similar or higher deduction than actual costs

Once you choose simplified expenses for a vehicle, you must continue using the flat rate for that vehicle for as long as you use it for business. You cannot switch back to actual costs.

Vehicle mileage rates

Instead of tracking fuel, insurance, repairs, road tax, and other running costs, you can claim a flat rate per business mile:

For example, if you drive 12,000 business miles in your car:

• First 10,000 miles at 55p = £5,500
• Remaining 2,000 miles at 25p = £500
• Total claim: £6,000

If you have an expensive vehicle with high running costs, or you drive very high business mileage, actual costs might give you a higher deduction. Compare both methods before deciding.

You cannot use simplified mileage if you have previously claimed capital allowances on the vehicle or included it in your accounts as a business asset.

Working from home rates

If you work from home, you can claim a flat rate based on hours worked instead of calculating actual household costs:

Working hours means time spent on business activities, including providing services, administration, marketing, and maintaining records. Simply being at home is not enough - you must be actively working.

Alternatively, calculate actual costs by working out the business proportion of your rent/mortgage interest, utilities, council tax, and broadband. This often gives a higher deduction but requires more detailed records.

For example, using actual costs:

• Your home has 5 rooms, 1 used as an office = 20% of space
• You work 40 hours in a 168-hour week = 24% of time
• Combined factor: 20% x 24% = 4.8% of household costs
• Household costs £12,000/year x 4.8% = £576 allowable

Compare this with simplified expenses: 101+ hours/month = £26 x 12 = £312. In this example, actual costs give a better result.

Living at business premises

If you live at your business premises (common for guest houses, B&Bs, pubs, and care homes), use these flat rates to adjust for personal use:

Claim all your premises expenses (rent, utilities, insurance, repairs), then deduct the flat rate for personal use. The remainder is your allowable business expense.

For example, you run a B&B with total premises costs of £18,000. Two people live at the premises:

• Total premises expenses: £18,000
• Personal use deduction: £500 x 12 months = £6,000
• Allowable business expense: £12,000

Capital allowances for equipment

Business equipment (computers, machinery, furniture, vehicles) is claimed through capital allowances, not as regular expenses:

Since April 2024, cash basis has been the default accounting method for most sole traders. Under cash basis you can claim most equipment purchases as regular expenses in the year you buy them, except business cars, which still use capital allowances. You also claim expenses when you pay them, not when you receive the invoice, which can affect the timing of deductions around your year end.

Car capital allowances

If you buy a car for business use, the capital allowance depends on CO2 emissions:

If you use the car for both business and personal journeys, reduce the capital allowance by your personal use percentage. Keep a mileage log to support your calculation.

Mixed-use expenses: how to apportion

Many expenses have both business and personal elements. You must calculate and claim only the business portion:

To apportion sensibly:

• Track usage for a representative period (e.g., one month) then apply that percentage for the year
• Document your methodology - HMRC may ask how you calculated the split
• Be reasonable and consistent - aggressive claims invite scrutiny
• Review annually if your usage pattern changes significantly

Record keeping requirements

You must keep records of all business expenses to support your claims:

Also keep mileage logs if you claim vehicle mileage, time records if you claim the working-from-home flat rate, and the calculations showing how you split mixed-use costs. Photographs or scans of receipts are acceptable.