Allowable expenses — what you can and cannot claim

One of the most effective ways to reduce your tax bill legally is to claim every allowable business expense you are entitled to. Yet many sole traders, freelancers, and limited company directors either under-claim — missing out on legitimate deductions — or over-claim, which can trigger HMRC enquiries and penalties.

This guide covers the key categories of allowable expenses, how the rules differ between sole traders and limited company directors, the flat rates HMRC allows, and the common mistakes that trip people up every year.

The golden rule — "wholly and exclusively"

Before diving into specifics, it helps to understand the principle that underpins all expense claims. For an expense to be allowable, HMRC requires that it was incurred "wholly and exclusively for the purposes of the trade." In practice this means:

If an expense is purely for business, you can claim it in full. If it is used partly for business and partly for personal purposes — a mobile phone, a home broadband connection, a car — you can claim the business proportion only, and you must be able to justify that proportion if HMRC asks. If an expense has a dual purpose that cannot be separated — such as a meal that is partly social and partly business — HMRC will typically disallow the entire cost.

Main categories of allowable expenses

Office and administration costs

Stationery, printer ink, postage, business cards, software subscriptions, cloud storage, and accounting software are all allowable. Phone and broadband costs can be claimed to the extent they are used for business. If you have a dedicated business phone contract in your company's name, the full cost is allowable. For a shared personal contract, only the business proportion is claimable.

Travel and transport

Business travel — to client sites, temporary workplaces, meetings, and between different business locations — is allowable. Your regular commute from home to your normal place of work is not. For vehicles, you can either claim actual running costs and calculate the business proportion, or use HMRC's approved mileage rates. The flat rates for 2025/26 are 45p per mile for the first 10,000 business miles, then 25p per mile above that.

Working from home

If you work from home regularly, you can claim a proportion of your household running costs. For sole traders, HMRC's simplified flat rate for 2025/26 is £10 per month if you work from home 25–50 hours monthly, £18 per month for 51–100 hours, and £26 per month for over 100 hours. For limited company directors, HMRC allows a flat rate of £6 per week (£312 per year) as a simple, evidence-free deduction.

Staff and employment costs

Salaries, employer National Insurance contributions, workplace pension contributions, and recruitment costs are all allowable. Staff training and development costs relevant to the current trade are also deductible. For limited company directors, your own salary as an employee of the company is a deductible expense that reduces corporation tax. Dividends paid to yourself are not expenses — they come from post-tax profit.

Professional fees and subscriptions

Accountancy fees, bookkeeping costs, legal advice relating to the business, professional indemnity insurance, public liability insurance, and relevant professional body memberships are all allowable. Personal expenses claimed as professional fees are not.

Marketing and advertising

Website costs, domain registration, hosting, digital advertising, printed materials, and social media management are allowable. Client entertainment — meals, events, hospitality — is explicitly disallowed by HMRC, regardless of how clear the business purpose is.

Equipment and capital items

Day-to-day running costs are deducted directly from profit. Larger purchases you expect to keep and use over several years — computers, office furniture, machinery — are capital items handled differently. Businesses can claim the Annual Investment Allowance (AIA) of up to £1 million per year for full tax relief on qualifying capital expenditure in the year of purchase.

What you can and cannot claim

Sole trader vs limited company — key differences

The categories of allowable expenses are broadly similar, but the mechanism and some specific rules differ.

Expense area	Sole trader	Limited company
Working from home	Flat rate (£10–£26/month) or actual proportion	£6/week flat rate, or actual proportion via rental agreement
Director salary	Not applicable — drawings are not expenses	Salary is a deductible company expense
Trivial benefits	Not applicable	Up to £50 per benefit, max £300/year for directors
Mobile phone	Business proportion of personal contract	Full cost if contract is in company name
Record retention	5 years after 31 January deadline	6 years from end of financial year

The importance of good records

Claiming an allowable expense is only half the story — you need to evidence it. HMRC can open an enquiry into any return and will ask for receipts, invoices, and bank statements to support expense claims. Keep records for at least five years after the 31 January submission deadline as a sole trader, or six years from the end of the financial year for a limited company.

Under Making Tax Digital, digital record-keeping is now mandatory for VAT-registered businesses and from April 2026 for self-employed individuals earning above £50,000. Using accounting software from the outset makes this significantly easier and reduces the risk of missing legitimate claims.

The most common mistakes

The most frequent errors we see are: claiming personal expenses as business costs, including commuting mileage as business travel, attempting to claim client entertainment (which HMRC specifically disallows), claiming mixed-use items at full cost rather than the business proportion, and failing to claim expenses at all because of uncertainty. If you are unsure whether something qualifies, the safest approach is to ask — not to guess, and not to skip it entirely.

This article is for general information purposes and does not constitute tax advice. Allowable expense rules can differ depending on your business structure, industry, and individual circumstances. Please speak to a qualified accountant before making decisions about your expense claims.