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:

• Actual expenses: Track and claim the real costs you incur
• Simplified expenses: Use HMRC's 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.

When to use the trading allowance: 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.

Important: 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:

• Wholly: The entire expense must relate to your business
• Exclusively: 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.

When to use simplified expenses:

• 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

Important: 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:

Example calculation: If you drive 12,000 business miles in your car:

• First 10,000 miles at 45p = £4,500
• Remaining 2,000 miles at 25p = £500
• Total claim: £5,000

When actual costs may be better: 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.

Restrictions: 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:

What counts as working hours: 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.

Alternative method: 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.

Calculation example for 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:

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

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:

Cash basis change from April 2024: If you use cash basis accounting (now the default for sole traders), you can claim most equipment purchases as regular expenses in the year you buy them. The exception is business cars, which still use capital allowances.

Car capital allowances

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

Private use adjustment: 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:

Practical tips for apportionment:

• 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:

What records to keep:

• Receipts and invoices for all purchases
• Bank and credit card statements
• Mileage logs (if claiming vehicle expenses)
• Time records (if claiming working from home flat rate)
• Calculations showing how you apportioned mixed-use expenses

Digital records: Photographs or scans of receipts are acceptable. Consider using accounting software or expense apps to capture and categorise expenses throughout the year.

Cash basis vs traditional accounting

From April 2024, cash basis is the default accounting method for most sole traders: