The “wholly and exclusively” rule

HMRC allows you to deduct business expenses from your income before working out how much tax you owe. The test for whether something qualifies is whether it was incurred wholly and exclusively for your trade. Costs with a personal element — a phone contract you also use socially, a car you drive for the school run as well as client visits — need to be split, with only the business proportion claimed.

Two routes exist for working this out:

• Actual costs: track the real cost of everything and apportion business use precisely.
• Simplified expenses: use HMRC’s flat rates for vehicles, home working, and living on business premises, instead of calculating actual costs.

Simplified expenses are only available to sole traders and partnerships without a corporate partner — not limited companies. You don’t have to use them, and you can choose the method that gives the better result, but once you pick a method for a particular vehicle, you generally need to stick with it for that vehicle for as long as you own it.

Office and home working costs

If you work from home, you have two options for claiming a share of your household costs.

Simplified flat rate

Based on hours worked from home each month:

This covers heating, electricity and similar running costs, but it does not include phone or internet — you claim the business proportion of those separately, based on actual bills.

Actual cost method

Work out the proportion of your home used for business (by room count or floor area) and the proportion of time it’s used that way, then apply that fraction to your household bills — rent or mortgage interest, council tax, utilities, insurance, and repairs to the business area. This is more work but can produce a larger deduction if you have a dedicated home office and high household costs.

If you rent premises separately from your home — an office, studio, or workshop — the full cost is an allowable expense, along with business rates, utilities, and insurance for that space.

Vehicle and travel expenses

Business mileage — travelling to meet clients, visit suppliers, or between different work sites — is one of the most valuable expenses available to sole traders, and one of the most commonly under-claimed.

Simplified mileage rates (2026/27 tax year, from 6 April 2026)

The mileage rate is designed to cover fuel, insurance, servicing, repairs, and depreciation in a single figure, so if you use it, you can’t separately claim these running costs for the same vehicle. The alternative is claiming a proportion of actual running costs plus capital allowances on the vehicle itself — usually only worth doing for vehicles with low business mileage relative to their running costs, or for vans and other vehicles with higher annual costs.

Ordinary commuting from home to a single permanent workplace doesn’t count as business mileage. Travel between different client sites, suppliers, networking events, or a temporary workplace does.

Other allowable travel costs: train and bus fares, parking, congestion charge and toll fees, and accommodation and reasonable subsistence when travelling overnight for business.

Staff and subcontractor costs

If you employ people, their gross wages, employer National Insurance contributions, pension contributions, and recruitment costs are all allowable. Payments to subcontractors for business-related work — a bookkeeper, a virtual assistant, a freelance designer — are also deductible, though if you’re in construction, you’ll need to operate the Construction Industry Scheme on subcontractor payments rather than claiming them as a simple expense.

Your own wages, drawings, or “salary” as a sole trader are not an allowable expense — more on this below.

Stock, materials and equipment

The cost of goods bought for resale, raw materials, and packaging is fully deductible in the year you incur it. Smaller tools and equipment used up quickly can usually be claimed as a straightforward expense; larger equipment that will last several years — a laptop, machinery, a company vehicle — is typically claimed through capital allowances rather than as a day-to-day expense (see capital allowances vs expenses).

Stationery, postage, printing, and software subscriptions used for the business are all allowable in full.

Marketing, subscriptions and professional fees

Advertising costs — a website, paid social ads, print advertising, business cards, signage — are allowable in full. So are trade body and professional membership subscriptions, provided they’re relevant to your trade.

Professional fees for accountants, solicitors, and business advisers are deductible when they relate to the ongoing running of your business — preparing accounts, general legal advice on contracts, debt recovery. Fees connected with buying a capital asset, such as legal costs on a property purchase, are usually added to the cost of the asset rather than claimed as a standalone expense.

Insurance, bank charges and finance costs

Business insurance — public liability, professional indemnity, employers’ liability if you have staff, and insurance on business equipment or premises — is fully allowable. See our business insurance guide for what cover you’re likely to need.

Bank charges, interest, and fees on business accounts and business credit cards are deductible. Interest on business loans is also allowable in full — the old £500 annual cap on loan interest and bank charges under the cash basis was scrapped from the 2024/25 tax year onwards, alongside the previous £150,000 turnover limit for using the cash basis at all. Cash basis is now the default method for sole traders, whatever your turnover, unless you actively opt out in favour of accruals accounting.

Training and professional development

Training costs are allowable where they maintain or update skills and knowledge you already use in your business — a refresher course, an update on regulatory changes in your industry, or software training relevant to your existing work.

Training that gives you a genuinely new skill or qualification to move into a different trade or profession is generally treated as a capital cost rather than a revenue expense, and isn’t deductible in the same way. The distinction — updating existing expertise versus acquiring a new one — catches out a fair number of sole traders who assume all professional development is automatically claimable.

What you can’t claim

Some costs feel like business expenses but fall outside HMRC’s rules:

Capital allowances vs expenses

Day-to-day running costs are claimed as expenses in the year you incur them. Larger purchases that will benefit your business over several years — equipment, machinery, computers, vehicles — are usually claimed through capital allowances instead, which let you deduct the cost of the asset from your taxable profit.

Most sole traders use the Annual Investment Allowance, which lets you deduct the full cost of qualifying equipment in the year of purchase, up to a generous annual limit that covers the vast majority of small business purchases. Cars don’t qualify for the Annual Investment Allowance and instead attract writing-down allowances based on their CO2 emissions, generally over several years.

If you use the cash basis for your accounts — the default method for most sole traders — you can often claim the full cost of most equipment and vehicles as a straightforward expense in the year of purchase, with cash basis capital allowances effectively achieving the same result with less paperwork. Cars remain the main exception here too.

Record keeping

Keep evidence for every expense you claim: receipts, invoices, bank statements, and mileage logs. HMRC can enquire into a return up to twelve months after the online filing deadline in normal circumstances, and considerably longer if it suspects careless or deliberate errors — so keep records for at least five years after the 31 January submission deadline for that tax year.

A separate business bank account, even as a sole trader where it isn’t a legal requirement, makes this dramatically easier — see our business bank accounts guide for what to look for.

Common mistakes

Useful resources

• HMRC Simplified Expenses — gov.uk/simpler-income-tax-simplified-expenses
• HMRC Business Income Manual (expenses) — gov.uk/hmrc-internal-manuals/business-income-manual
• Our self-assessment guide for sole traders — everything you need to know about filing your return
• Our bookkeeping basics guide — keeping records that make expenses easy to claim