Allowable Business Expenses

A complete guide to what you can claim — for sole traders and limited companies in 2026/27.

The golden rule: An expense is allowable if incurred wholly and exclusively for business purposes. Dual-purpose costs (personal and business) are generally not deductible unless the business element can be clearly separated.

The Wholly and Exclusively Rule

HMRC's test for allowable expenses is that they must be incurred wholly and exclusively for the purposes of the trade or business. If an expense has a dual purpose — business and personal — it is generally not deductible. However, where the business portion can be clearly separated, a proportion may be claimed.

For limited companies, the same principle applies, but the company is a separate legal entity — so expenses genuinely incurred by the company for business purposes are deductible even if they benefit the director personally (for example, a training course).

Common Allowable Expenses

🏢 Office & Premises

  • Office rent and service charges
  • Business rates
  • Utilities (gas, electric, water)
  • Cleaning and maintenance
  • Security costs

💻 Equipment & Technology

  • Computers, laptops, phones
  • Software subscriptions
  • Printers and peripherals
  • Cloud storage services
  • Accounting software

🚗 Travel & Vehicles

  • Business mileage (HMRC rates)
  • Train, bus, and taxi fares
  • Parking (business only)
  • Hotel accommodation (working away)
  • Reasonable subsistence when travelling

👥 Staff Costs

  • Salaries and wages
  • Employer NI contributions
  • Pension contributions (employer)
  • Staff training and development
  • Recruitment fees

📢 Marketing & Sales

  • Website hosting and design
  • Online advertising (Google, social)
  • Print advertising and leaflets
  • Samples and promotional materials
  • Trade show costs

🎓 Professional Fees

  • Accountancy and bookkeeping
  • Legal fees (business-related)
  • Bank charges and interest
  • Professional subscriptions
  • Insurance premiums

✗ Usually NOT Allowed

  • Client entertaining and hospitality
  • Personal clothing (even if worn for work)
  • Fines and penalties
  • Dividends paid to shareholders
  • Personal mobile phone (personal use)
  • Mortgage capital repayments

✗ Capital Items (Need Capital Allowances)

  • Equipment purchases (claim via AIA)
  • Commercial vehicles (claim via AIA)
  • Building improvements
  • Depreciation (not tax-deductible)

Home Working Expenses

Sole traders working from home can claim one of two ways:

  • Flat rate (simplified method): £6 per week — no receipts required. For 25+ hours/month working from home; higher flat rates apply at 51+ and 101+ hours.
  • Actual costs: A proportionate share of household bills (utilities, broadband, insurance). Mortgage interest is not allowable; rent is. Calculate the proportion based on rooms used and hours worked.

Limited company directors can have the company pay them £6 per week as a home working allowance, which is tax and NI free. Alternatively, the company can reimburse actual additional costs incurred with supporting evidence.

Tip: For most sole traders, the flat rate of £6/week is simpler and avoids any challenge from HMRC about the proportion of home costs. Only switch to actual costs if your genuine business use of the home is substantial.

Mileage and Vehicle Costs

Sole traders and partnerships can use HMRC's simplified mileage rates (cars: 45p/mile for first 10,000, then 25p; motorcycles: 24p; bicycles: 20p) instead of claiming actual vehicle costs. Once you start using actual costs for a vehicle, you can't switch to mileage rates for that vehicle.

Limited companies can reimburse employees and directors at the HMRC approved rates. If the company owns a vehicle, it claims actual costs including fuel, insurance, servicing, and capital allowances — but must account for any benefit-in-kind if there is private use.

Capital Allowances

The cost of buying assets (equipment, machinery, vehicles) is not deducted as an expense. Instead, you claim capital allowances. The key types:

AllowanceRateQualifying Assets
Annual Investment Allowance (AIA)100% in year 1Most plant and machinery, up to £1m/year
Full Expensing (limited companies)100% in year 1New qualifying main rate assets (no cap)
Writing Down Allowance (main pool)18% per yearPlant and machinery above AIA limit
Writing Down Allowance (special rate)6% per yearIntegral features, long-life assets

Sole traders claim capital allowances on their Self Assessment return. Limited companies include them in the CT600.

Simplified Expenses (Sole Traders Only)

HMRC's simplified expenses scheme lets sole traders and partnerships use flat rates for three categories, instead of working out actual costs:

  • Vehicles: HMRC mileage rates (see above)
  • Working from home: £6/week (25–50h/month), £14/week (51–100h), £26/week (101h+)
  • Premises used for business and home: flat rates based on number of occupants who don't pay rent

Limited companies cannot use simplified expenses.

Frequently Asked Questions

What counts as an allowable business expense? ▼
Any cost incurred wholly and exclusively for business purposes. The test is the same for income tax (sole traders) and corporation tax (limited companies). Dual-purpose expenses — those that serve personal and business needs simultaneously — are not deductible unless a clear business portion can be identified.
Can I claim home working expenses? ▼
Yes. Sole traders can claim £6/week flat rate or a proportion of actual costs. Limited company directors can receive a £6/week home working allowance from the company, or claim reimbursement of additional costs with evidence.
Can I claim clothing as a business expense? ▼
Only specialist clothing — uniforms, protective equipment, costumes for performers. Everyday work clothes (suits, smart attire) are not allowable even if worn exclusively for work, because they also serve a personal purpose.
What is the Annual Investment Allowance? ▼
The AIA gives a 100% deduction in year one for qualifying plant and machinery up to £1,000,000 per year. This covers computers, equipment, commercial vehicles, and most tools. Shared between associated companies.
Can I claim entertaining clients as an expense? ▼
No. Client entertaining — meals, events, hospitality — is specifically disallowed by HMRC. Staff entertaining (e.g. a Christmas party up to £150/head) is deductible and can be exempt from benefit-in-kind if properly structured.