Allowable business expenses, a guide for sole traders and limited companies
Overview
Claiming legitimate business expenses reduces taxable profit, but sole traders, limited companies and their directors do not all follow the same rules. A cost deductible by a company is not automatically tax-free for its director, and an allowable expense does not automatically qualify for VAT recovery.
This guide explains common expense categories and the main pitfalls. It reflects guidance reviewed on 14th October 2026, including rates for the 2026/27 tax year. Individual claims depend on the facts, accounting method and applicable rules.
Detailed Content
The basic rules
For sole traders, expenses must be incurred wholly and exclusively for the trade. An identifiable business element of a mixed-use cost can often be claimed, but a cost with an inseparable private purpose may be disallowed altogether.
A company also needs to establish the business purpose of its expenditure and distinguish running costs from capital expenditure. Separately, directors and employees claiming relief for personally incurred employment expenses generally face the stricter test that costs must be incurred wholly, exclusively and necessarily in performing their duties, subject to specific statutory rules and exemptions.
Sole traders using the £1,000 trading allowance cannot also deduct actual expenses against the same income. A deduction reduces taxable profit, not the cost pound for pound.
1. Office costs and software
Business stationery, postage, printing and recurring software subscriptions are normally allowable. Sole traders should exclude private use. Equipment and longer-term software purchases may need different treatment from subscriptions.
2. Working from home
Sole traders: claim a reasonable business share of eligible household costs, such as heating, electricity, rent, mortgage interest and Council Tax. Mortgage capital repayments are not an expense. Apportionment should reflect the space and time used for business.
Alternatively, qualifying sole traders can use simplified homeworking expenses:
Business hours worked at home each month
Monthly deduction
25 to 50
£10
51 to 100
£18
101 or more
£26
Telephone and internet costs are not included in these flat rates; claim their allowable business element separately. Do not also claim the household costs already covered by the flat rate.
Directors and employees: under qualifying regular homeworking arrangements, an employer can normally pay £6 a week, or £26 a month for monthly-paid employees, towards additional household expenses without evidence of the amount spent. Higher tax-free payments require evidence of eligible additional costs. Existing mortgage interest, rent and Council Tax are not automatically reimbursable tax-free.
From 6th April 2026, employees can no longer claim personal tax relief for unreimbursed homeworking household costs. This does not remove the separate exemption for qualifying employer payments.
Using part of a home exclusively for business can restrict Private Residence Relief when it is sold, whether the business is incorporated or not. A commercial rental arrangement with a company needs separate advice.
3. Business mileage and travel
For 2026/27, the approved mileage rates for employees and directors using their own cars or vans are 55p per business mile for the first 10,000 miles and 25p thereafter. The first-band rate was 45p before 6th April 2026. Motorcycle and bicycle rates are 24p and 20p respectively.
Eligible sole traders using simplified vehicle expenses also use 55p and 25p for cars and goods vehicles in 2026/27, and 24p for motorcycles. This replaces the vehicle’s purchase and running-cost deductions; do not also claim fuel, servicing or capital allowances for the same vehicle. Restrictions apply if its cost or capital allowances have already been claimed. Once adopted, the mileage method must continue while that vehicle remains in business use.
Qualifying parking, tolls and other business travel costs can be claimed separately. Keep journey dates, destinations, business purposes and mileage. Fines are not allowable.
4. Commuting and workplaces
Ordinary home-to-work commuting is generally not allowable. Employees and directors may qualify for travel to temporary workplaces, but the statutory rules, including the 24-month rule, must be checked. Sole traders have different travel rules; the employee temporary-workplace test should not simply be applied to them.
5. Actual vehicle costs and company cars
Sole traders not using simplified mileage can normally claim the business share of eligible running costs, with the purchase treated under the relevant expense or capital-allowance rules.
A company-owned car is different from a director’s personally owned car. Company-car private use, including commuting, can create a taxable benefit and employer National Insurance liability.
6. Electric cars
New and unused electric or zero-emission cars can qualify for a 100% first-year capital allowance. Current guidance provides this relief for qualifying expenditure before 1st April 2027. Second-hand electric cars do not qualify for this particular allowance.
The relief is not restricted to limited companies, although sole-trader private use restricts the claim. Company-car benefits and VAT recovery must be considered separately. A 100% allowance is a deduction from taxable profit, not a refund of the purchase price.
7. Phones and broadband
Sole traders can normally claim the supported business element of phone and internet costs.
A company can normally provide one mobile phone or SIM card per employee or director tax-free, including private use, where the contract is between the employer and supplier. Salary sacrifice can change the treatment.
Reimbursing a director’s personally contracted monthly tariff is different: a business-use percentage does not automatically make it tax-free. Identifiable additional business-call costs may qualify. Reimbursement of existing personal broadband also does not automatically qualify for exemption; different rules apply to a qualifying new connection needed for homeworking.
8. Meals and subsistence
Everyday meals are normally private expenditure. Sole traders may qualify for reasonable subsistence on eligible overnight business trips, occasional business journeys outside their normal pattern, or in an itinerant trade, subject to the conditions.
Employees and directors have separate rules linked to qualifying business travel. A meal does not become deductible simply because work is discussed while eating.
9. Clothing and protective equipment
Protective clothing, PPE and genuine work uniforms can qualify. Ordinary suits, shirts and shoes are not allowable merely because they are worn for work. Adding a logo is not a universal route to making ordinary clothing deductible; the garment and its purpose matter.
10. Marketing and networking
Business advertising, routine website costs and promotional materials are normally allowable. Major website-development costs may require capital treatment. Networking charges need review where they include client hospitality or other disallowed entertainment.
11. Professional fees
Business bookkeeping, accounts preparation and relevant legal advice are normally allowable. Personal advice and a sole trader’s personal Self Assessment return preparation are not business deductions. Split mixed invoices appropriately. Fees connected with buying capital assets, setting up or restructuring a business can require different treatment.
12. Training and CPD
Sole traders can normally claim training that maintains, improves or develops skills relevant to their existing business, including appropriate new technology or administrative skills. Training to start a new business or enter an unrelated business area is generally not allowable.
Employer-funded work-related training for directors and employees follows separate rules. Do not automatically apply the sole-trader restriction to every company-funded course.
13. Bank charges and finance
Business bank charges and interest on business borrowing can normally qualify. Loan capital repayments do not. The use of borrowed funds matters, not just the account’s name. A sole trader using a mixed account must identify business costs rather than claim all charges. Company and personal finances should remain separate.
14. Staff costs
Commercial staff salaries, employer National Insurance, pension contributions, recruitment and training costs are normally allowable, subject to the relevant conditions. Payments to family members must reflect genuine work and reasonable remuneration.
A sole trader’s own drawings and personal pension contributions are not staff expenses. Company dividends are not deductible remuneration. Employer pension contributions also require consideration of tax-relief conditions and the individual’s pension allowances.
15. Insurance
Appropriate professional indemnity, public liability, employers’ liability and business-interruption insurance is normally allowable. Personal life cover is not automatically a business expense. Relevant life policies and key-person insurance have distinct rules; obtain advice on the particular policy rather than assume relief because a company pays the premium.
16. Equipment and capital allowances
Under sole-trader cash basis, most eligible equipment purchases are treated as expenses, with cars subject to separate rules. Under traditional accounting, and for companies, equipment purchases normally require consideration of capital allowances rather than a deduction for accounting depreciation.
The Annual Investment Allowance can provide an immediate deduction for qualifying plant and machinery within the £1 million allowance for a 12-month period. Cars are excluded. Short periods, multiple businesses, connected companies and private use can affect the available allowance. Other allowances may apply where AIA is unavailable.
17. Memberships and journals
Trade-body subscriptions and professional journals related to the business are normally allowable for sole traders. Personal gym membership is not normally a business expense, even if the owner works in fitness. Company-funded memberships can also create employee benefits; personal tax exemption must be checked separately.
18. Pre-trading expenses
Qualifying revenue expenses incurred within seven years before trading begins can be treated as incurred when the trade starts, provided they would have been deductible in the trade and are not relieved elsewhere. Capital purchases and stock have separate treatment. Company formation and pre-incorporation costs should not automatically be included in this relief.
19. Business gifts and entertaining
Client entertaining is generally not deductible. A narrow exception allows certain promotional gifts bearing a conspicuous advertisement on the gift itself, where the total cost to the same recipient does not exceed £50 in the relevant tax period. This means the tax year for sole traders and the accounting period for companies. Food, drink, tobacco and tokens or vouchers exchangeable for goods do not qualify under this exception.
Genuine staff entertaining can be deductible. Separately, qualifying annual staff functions can be exempt from employee tax where they are open to all employees and cost no more than £150 per person, subject to the rules for multiple events. This is an exemption, not a £150 allowance, and is not the limit on the employer’s expense deduction. Client entertaining does not become deductible through the staff-party rules.
20. Records and common mistakes
Keep receipts, invoices, bank records, mileage logs and explanations of business purpose. Avoid duplicate claims, unsupported percentages, personal purchases, private car costs and ordinary commuting.
Sole traders must normally retain records for at least five years after the 31st January filing deadline for the relevant tax year. Companies normally retain accounting records for six years from the end of the last company financial year they relate to. Longer retention can be required, particularly for lasting assets, late returns or ongoing checks. These periods are not limits on how far back HMRC can assess tax.
Digital records are generally acceptable if complete, readable and retrievable. Where MTD applies, storing receipt photographs alone does not satisfy all digital-record requirements.
Step By Step Procedure
Identify the correct rules. Establish whether the cost belongs to a sole trader, company or employee, and confirm the accounting method.
Capture supporting evidence. Save invoices and receipts, note the business purpose and maintain mileage or usage records where relevant.
Categorise accurately. Separate running costs, capital purchases, private spending, entertaining and potentially taxable benefits.
Check mixed use and reimbursement. Use a reasonable, evidenced allocation where permitted. For directors, check the employment-tax treatment separately from the company deduction.
Avoid double claims. Do not combine mileage with the same vehicle’s running costs, or actual expenses with the trading allowance against the same income.
Review before filing. Ask your accountant to check uncertain items, capital allowances, payroll reporting and any VAT recovery.
Retain records securely. Apply the correct retention period and keep records longer where an asset, outstanding return or HMRC check requires it.
Frequently Asked Questions And Answers
Can I claim a laptop used partly for personal purposes?
For a sole trader, normally only the business share qualifies. If business use is 70%, the claim generally reflects that proportion, but whether relief is an expense or capital allowance depends on the accounting method. A company-provided laptop follows different rules: insignificant private use may be exempt, while more substantial private use can create an employee benefit.
Can I claim my home broadband?
A sole trader can normally claim a reasonable, supported business share. A company reimbursing a director’s existing personal broadband does not automatically qualify for tax-free treatment. Check the contract, whether there is an additional cost and the relevant exemption.
Can I deduct a meal with a client?
Usually not: client entertaining is generally disallowed even where the meeting has a business purpose. Staff entertaining and qualifying business-travel subsistence have separate rules.
Can my company pay for my mobile phone?
Normally one employer-provided phone or SIM per employee or director can be exempt, including private use, if the employer contracts with the supplier and the salary-sacrifice rules do not change the treatment. Paying or reimbursing a personally contracted tariff is not the same exemption.
Can I claim £6 a week for working from home?
Not as the standard sole-trader flat rate. Sole traders use the monthly £10, £18 or £26 simplified rates where eligible, or an actual-cost calculation. A company may make qualifying employer homeworking payments of £6 a week or £26 a month. Personal employee homeworking tax relief ceased from 6th April 2026.
How long must I keep expense records?
Normally five years after the relevant 31st January filing deadline for sole traders, and six years from the end of the last relevant company financial year for companies. Longer periods may apply. Do not destroy records needed for an ongoing check or the future disposal of an asset.
Can I claim expenses incurred before starting?
Qualifying revenue costs within seven years before trading starts may receive relief, but the business-purpose and other conditions still apply. Equipment, stock, formation costs and expenditure incurred personally before incorporation need separate consideration.
Does an allowable expense mean I can recover the VAT?
No. VAT recovery has its own rules, including VAT registration, valid evidence, business use and restrictions on items such as cars and entertaining. Check it separately from Income Tax or Corporation Tax deductibility.
How can 360 Accounts help?
360 Accounts & Bookkeeping can help organise expense records, review uncertain claims and distinguish business deductions from capital allowances and director benefits. Obtain advice before making a significant purchase or relying on an unusual claim.