You can deduct any expense that is "wholly and exclusively" for business purposes.
- Clearly deductible: stock, materials, software, rent, business insurance, professional subscriptions, business mileage at 45p/mile, accountant fees
- Apportion business %: phone, internet, home office (if you work from home), some travel costs
- Not deductible: personal food/drink, client entertainment (claimable but tax-disallowed), fines and parking penalties, your own salary if sole trader, mortgage capital repayments
- Capital allowances are separate from expenses — for equipment, vehicles and machinery costing over £200 (Annual Investment Allowance up to £1m)
Every year, UK micro businesses leave thousands of pounds on the table by under-claiming legitimate business expenses. This isn’t about being aggressive with tax — it’s about claiming what you’re entitled to under HMRC’s own rules.
This guide walks through the main expense categories, the HMRC tests, and the grey areas where business owners commonly get it wrong (in both directions — over-claiming and under-claiming).
The core rule: "wholly and exclusively"
HMRC’s rule for sole traders, partnerships and limited companies is simple to state and tricky to apply: an expense is only deductible if it was incurred wholly and exclusively for the purposes of the trade.
What this means in practice:
- Wholly: the entire amount needs to be business-related. If something is partly personal (like your home internet bill), you can only claim the business proportion.
- Exclusively: the expense’s purpose must be the trade. If there’s a "duality of purpose" (it serves both business and personal aims), HMRC usually says no — unless you can clearly apportion.
The classic test: would you have incurred this cost if you weren’t running the business? If yes, it’s probably not deductible.
Definitely deductible expenses
✓ Always claimable
Office costs and supplies
Stationery, printer ink, postage, courier fees, software subscriptions (accounting, design, productivity), domain names, hosting fees, professional templates. Anything you buy specifically for the business and use up within the year.
✓ Always claimable
Stock and raw materials
The cost of goods you sell, raw materials you transform, packaging, dispatch supplies. Note: stock is recognised when sold, not when purchased — unsold stock at year-end is an asset, not an expense.
✓ Always claimable
Business premises
Commercial rent, business rates, electricity, gas, water, cleaning, security, repairs to business property, business insurance. If you use part of your home for business, see the home-office section below.
✓ Always claimable
Staff costs
Wages, employer NIC (15% above £5,000), employer pension contributions, training (for current role), uniforms and PPE, staff entertainment up to £150/head/year, recruitment fees.
✓ Always claimable
Professional fees
Accountant fees, bookkeeper fees, solicitor fees for business matters, professional indemnity insurance, professional subscriptions (e.g. IAB, ICAEW, AAT, RICS, professional body memberships), trade association fees.
✓ Always claimable
Marketing and advertising
Website costs, Google Ads, Facebook/LinkedIn ads, print advertising, business cards, signage, PR services, photography for business use, content writing, SEO services.
✓ Always claimable
Business travel
Train, bus, taxi fares for business journeys (not commuting), parking, congestion charges, business flights, hotels for overnight business stays, mileage at HMRC AMAP rates (45p first 10,000 miles, 25p after — see our Mileage Calculator).
✓ Always claimable
Bank charges and finance costs
Business bank account fees, business credit card fees, business loan interest (sole traders), HMRC interest paid (paradoxically deductible), bank transfer fees. Note: for residential landlords, mortgage interest gets a 20% tax credit only (Section 24) — not a full deduction.
Apportion business percentage
⚠ Mixed-use — apportion
Home office costs (sole traders)
If you work from home, you can claim a portion of utilities, council tax, rent, mortgage interest (sole traders only), broadband and insurance. Two methods:
Simplified flat rate: £10/month (25-50 hrs), £18/month (51-100 hrs), £26/month (101+ hrs). Easiest but usually under-claims.
Actual cost method: work out the % of your home used for business (by floor area) and the % of time it’s used for business. Apply to total household running costs. More work but typically higher claim.
⚠ Mixed-use — apportion
Phone and internet
If your phone or broadband is in your personal name, claim the business proportion. Easiest: estimate the % of business use (e.g. "60% business calls") and apply to the bill. Keep a sample week of itemised calls to justify the percentage in case of HMRC review. Limited companies can pay for a dedicated business mobile/line and deduct 100%.
⚠ Mixed-use — apportion
Vehicle costs (own vehicle)
Two methods. Mileage method: claim 45p/mile (cars) up to 10,000 business miles, 25p/mile after. Simple, no separate vehicle records needed, but doesn’t cover everything.
Actual cost method: claim business % of fuel, insurance, MOT, servicing, road tax, depreciation. More paperwork; only worth it if you drive a lot of expensive miles. Once you pick a method for a vehicle, you must stick with it for that vehicle.
⚠ Mixed-use — apportion
Training and CPD
Training that maintains or updates existing skills in your current trade is deductible. Training to acquire new skills for a different field is treated as capital and not deductible. Examples that work: bookkeeper’s annual IAB CPD; tradesperson’s safety certification renewal; designer’s new software training. Examples that don’t: bookkeeper’s law degree; gardener taking a plumbing course to expand.
Not sure if your specific expense qualifies?
Edge cases are where most claims go wrong — either by missing legitimate deductions or claiming things HMRC will reject. Book a 20-minute call and we’ll work through your specific list.
Book a free 20-min callNOT deductible (or partially restricted)
✗ Don’t claim
Personal food and drink
You have to eat regardless of whether you’re working — HMRC’s reasoning. Exceptions: subsistence during overnight business travel away from your normal area (reasonable hotel breakfast/dinner are deductible); reasonable meal cost on a one-off business trip lasting most of a day. Buying lunch every day "because you’re working" doesn’t qualify.
✗ Don’t claim
Client entertainment
Tricky one: you can claim this as an expense in your accounts (showing the real economic cost), but it’s tax-disallowed — HMRC adds it back to your profit when calculating tax. The economic reality is that taking clients for lunch costs you the full amount, with no tax relief. Staff entertainment is different (deductible up to £150/head/year).
✗ Don’t claim
Fines and penalties
Parking fines, speeding tickets, late filing penalties, HMRC penalties — all non-deductible. The only paradoxical exception: HMRC interest you pay on late tax IS deductible (interest is a finance cost; penalties are a punishment).
✗ Don’t claim
Your own salary (sole trader)
As a sole trader, your "drawings" (money you take out for personal use) are NOT a business expense. You’re taxed on the profit, then take whatever’s left. Limited company directors are different — you can pay yourself a salary, which IS deductible for the company.
✗ Don’t claim
Mortgage capital repayments
Only the interest portion of a mortgage is potentially deductible. Capital repayments (paying down the loan) are never an expense — you’re building equity, not incurring a cost. For residential landlords, even mortgage interest gets restricted to a 20% tax credit since 2020.
✗ Don’t claim
Everyday clothing
Suits, smart shirts, "interview clothes" — not deductible even if you only wear them for work. HMRC’s reasoning: you could wear them outside work, so duality of purpose. Deductible: branded uniforms, PPE (safety boots, hi-vis), costumes for actors/performers, specialist protective clothing.
Capital allowances are separate
If you buy something with a useful life of more than one year (laptop, machinery, vehicle, equipment), it’s typically capital expenditure, not a revenue expense. You claim it via capital allowances instead, which spread the cost across multiple years (or, often, in one year via the Annual Investment Allowance).
The Annual Investment Allowance (AIA)
The AIA lets you deduct 100% of qualifying capital expenditure up to £1 million per year against your trading profit in the year of purchase. Qualifies: plant and machinery (most equipment), business vehicles (vans, not cars), tools, computers, integral features of buildings.
Example: buy a £50,000 piece of equipment in your accounting year. Apply AIA → £50,000 deducted from this year’s taxable profit. At 19% corporation tax, that saves £9,500 in CT. Compare with depreciation (which is NOT deductible for tax) — you’d only get back a fraction each year over the asset’s useful life.
Full expensing for limited companies
Limited companies investing in new and unused plant and machinery can claim 100% first-year allowance via "full expensing" (replaced the super-deduction in April 2023). Effectively the same as AIA but with no £1m cap. Useful for larger investments by profitable companies.
Cars are different
Business cars don’t qualify for AIA. They’re claimed through writing-down allowances, with the rate depending on CO₂ emissions: 100% first-year allowance for fully electric cars, 18% pool for low-emission, 6% pool for higher-emission. This is one of several reasons EV company cars have become attractive.
The expenses most micro businesses miss
From years of reviewing sole-trader and director accounts, here are the five expenses most commonly missed:
- Use of home as office — most sole traders either claim nothing or just take the flat rate. The actual cost method usually gives a higher claim.
- Pre-trading expenses — costs incurred up to 7 years before you started trading (e.g. business cards, professional membership, software, market research) can be treated as a Day 1 expense. Often forgotten.
- Business proportion of personal subscriptions — your LinkedIn Premium, Adobe Creative Cloud, Microsoft 365, professional journals. If you use them for business, claim the business proportion.
- Mileage to varied client sites — if you work in different locations and don’t have a "regular" workplace, mileage from home to client sites IS business mileage (not commuting).
- Bank interest on personal accounts used for business — if a small amount of your business money sits in a personal account due to set-up timing, the business portion of any interest charges is deductible.
Read together: the 5 Forgotten Business Expenses companion post goes deeper on these often-missed deductions, with worked examples.
Records: what HMRC expects
HMRC’s rules require you to keep records for 6 years (12 years for offshore income). In a compliance check, they can ask for:
- Receipts and invoices for every claimed expense (digital photos are fully accepted)
- Bank statements showing payment
- Mileage log showing date, business purpose, start point, end point, miles
- Apportionment calculation for any mixed-use expense (e.g. how you arrived at "60% business use" of your phone)
- Home office calculation (floor area, hours used)
Cloud accounting software (Xero, FreeAgent, QuickBooks) handles most of this automatically — attach the receipt photo to the bank transaction and you have a permanent, searchable record. This is how MTD-compliant bookkeeping works.
The annual review: are you claiming everything?
Once a year, before your accounts are finalised, run through this checklist:
- Have I claimed all my mileage? (Use the Mileage Calculator)
- Have I claimed my home office use?
- Have I claimed business proportion of phone/internet/utilities?
- Did I buy any equipment over £200 — do I have AIA records?
- Did I attend any conferences, training, professional events?
- Are all professional subscriptions claimed?
- Are any client entertainment costs correctly marked as tax-disallowed (so they don’t accidentally reduce taxable profit)?
- Have I separated capital from revenue expenses correctly?
Sources & further reading
This article was last reviewed in May 2026 and reflects HMRC guidance for the 2026/27 tax year. It’s general information, not personal tax advice. For your specific expense questions, please get in touch.