Claiming Expenses When Self-Employed

A self-employed worker in the UK pays income tax only on profit, not on turnover, so every allowable expense claimed reduces the tax bill. HMRC puts it plainly: a business with £40,000 of turnover that claims £10,000 of allowable expenses pays income tax on the remaining £30,000 (gov.uk). There is also a £1,000 tax-free trading allowance that can be claimed instead of expenses, which changes the sums entirely for smaller side businesses (gov.uk).

Getting expenses right is one of the highest-value tasks a sole trader carries out all year, and one of the easiest to get wrong. Claim too little and the business overpays tax. Claim personal costs by mistake and it risks a penalty if HMRC checks the return.

This guide sets out what counts as an allowable expense, the choice between the cash basis and traditional accounting, the simplified flat rates that cut the paperwork, how to handle use of home and vehicles, when the trading allowance beats claiming expenses, and what the move to Making Tax Digital means for record-keeping. Every figure is drawn from HMRC guidance for the 2026-27 tax year.

Key takeaways

• A self-employed person pays income tax on profit, so allowable expenses directly reduce the tax bill.
• An expense is allowable only where it is incurred wholly and exclusively for the business; mixed personal and business costs must be apportioned.
• Simplified expenses let sole traders claim flat rates for vehicles and working from home instead of totalling actual costs, but limited companies cannot use them.
• The £1,000 trading allowance can be claimed instead of expenses, and it usually wins only when real expenses are below £1,000.
• Larger equipment is claimed through capital allowances rather than as a day-to-day expense, unless the cash basis applies.
• Making Tax Digital for Income Tax brings mandatory digital records and quarterly updates, phased in from 6 April 2026 by income level.

What counts as an allowable expense

The core test is simple to state and easy to trip over. An expense is allowable only where it is incurred wholly and exclusively for the purposes of the business (gov.uk). Money taken out of the business for personal use is never an allowable expense, and where a cost serves both business and private purposes, only the business proportion can be claimed (gov.uk). A mobile phone used 70% for work and 30% for personal calls yields a claim for 70% of the bill, not the whole amount.

The main categories HMRC allows

HMRC groups allowable expenses into recognisable categories, and most sole traders will use several of them. Office running costs such as stationery, printing and phone bills qualify, as do the costs of business premises including rent, utilities and business rates (gov.uk). Stock and raw materials, staff wages and subcontractor costs, and marketing and advertising are all allowable, alongside professional fees for an accountant or solicitor and insurance policies taken out for the business (gov.uk).

The table below summarises the principal categories and gives a typical example of each, drawn from HMRC's own list.

Travel costs carry their own conditions. Business journeys are allowable, but ordinary commuting between home and a regular workplace is not, and travel that mixes business with a private trip must be split (gov.uk). Clothing follows a strict rule too, which the next section covers.

What is not allowable

Some costs feel like business expenses but are specifically disallowed. Everyday clothing cannot be claimed even where a sole trader buys an outfit purely to look presentable to clients; only genuine uniforms, protective clothing and recognised costumes qualify (gov.uk). Entertaining clients or suppliers is not an allowable expense, and neither are fines for breaking the law (gov.uk).

The most common error is claiming the private share of a mixed cost in full. Because the wholly and exclusively test governs everything, a home broadband bill, a family car or a phone used for personal calls must all be apportioned before any claim is made (gov.uk). Keeping a simple record of the business-use percentage is the difference between a defensible claim and an overclaim.

Cash basis or traditional accounting

Before totalling expenses, a self-employed person has to decide how they account for income and costs. The cash basis is now the default method for most sole traders, and it records income when money is actually received and expenses when they are actually paid (gov.uk). Traditional accounting, also called accruals accounting, records income and expenses on the date they are invoiced or billed, regardless of when cash changes hands (gov.uk).

How the cash basis works

The cash basis suits smaller businesses because it is simpler and because tax is only ever paid on money that has actually come in, which helps cash flow. Under the cash basis, most equipment bought for the business is claimed as an ordinary allowable expense in the year it is paid for, rather than through the capital allowances system (gov.uk). The main exception is a car, where capital allowances still apply even under the cash basis (gov.uk).

Traditional accounting becomes necessary for larger or more complex businesses, and it is the only method that allows some reliefs to be claimed in full. The choice affects which expenses can be claimed and when, so it is worth confirming before the first return of a new business is prepared (gov.uk).

Capital allowances under traditional accounting

Where a business uses traditional accounting, larger items that are kept and used over time are not claimed as day-to-day expenses. They are claimed through capital allowances instead. Plant and machinery, which HMRC defines broadly to include computers, tools, machinery and business vehicles, qualifies for these allowances (gov.uk). The Annual Investment Allowance lets a business deduct the full cost of qualifying plant and machinery up to £1,000,000 in the year of purchase, which covers the entire equipment spend of almost every sole trader (gov.uk).

The distinction matters because claiming a large equipment purchase in the wrong place can either inflate a claim that HMRC later disallows or delay relief the business was entitled to take immediately. A sole trader unsure which method applies to a given purchase should confirm the treatment before filing, since the cash basis and traditional accounting handle the same asset very differently (gov.uk).

Simplified expenses, the flat-rate shortcut

For two of the most fiddly expense areas, vehicles and working from home, HMRC offers simplified expenses: flat rates that remove the need to work out the business proportion of actual costs (gov.uk). Simplified expenses are available to sole traders and to partnerships that have no companies as partners, but they cannot be used by limited companies or by partnerships that include a limited company (gov.uk).

Flat-rate mileage for vehicles

Rather than tracking fuel, insurance, servicing and repairs and then apportioning them, a self-employed person can claim a flat rate per business mile. The rate is 45p per mile for the first 10,000 business miles in a car or van, and 25p per mile after that, with 24p per mile for motorcycles and 20p per mile for bicycles (gov.uk). A sole trader who drives 8,000 business miles in the year therefore claims £3,600 without keeping a single fuel receipt.

There is one firm restriction. Once simplified mileage is chosen for a particular vehicle, it must be used for that vehicle for as long as it is in the business, and it cannot be used at all if capital allowances have already been claimed on the same vehicle (gov.uk). The flat rate covers running costs only, so incidental business travel such as parking and tolls can still be claimed on top.

The working-from-home flat rate

The second flat rate covers the cost of working from home. Instead of apportioning household bills, a self-employed person who works at least 25 hours a month from home can claim a monthly flat rate based on hours worked (gov.uk). The rates are set out below.

The flat rate covers heating, lighting and power, but not telephone or internet, which are claimed separately on the business-use proportion (gov.uk). For a sole trader working long hours from a spare room, the flat rate is quick, but it is not always the largest claim available, which is where the actual-cost method comes in.

Use of home, the actual-cost method

A self-employed person who wants a larger and more accurate claim can work out the actual additional cost of using their home for the business instead of taking the flat rate. This method apportions household running costs by the number of rooms used for business and the time they are used, so it can produce a materially higher figure for someone using a dedicated room for most of the working week (gov.uk).

The costs that can be apportioned include heating, electricity, council tax, insurance, mortgage interest or rent, and repairs to the parts of the home used for business (gov.uk). Only the additional cost created by the business use can be claimed, not a share of costs that would have been incurred anyway. A practical caution applies where a room is used exclusively for business, because that can create a Capital Gains Tax charge on the business proportion when the home is later sold, so most advisers suggest keeping some private use of any room claimed. The two methods cannot be mixed for the same cost in the same accounting period, so the sole trader chooses whichever gives the better result and applies it consistently (gov.uk).

The £1,000 trading allowance and when to use it

The trading allowance is a flat £1,000 of tax-free income that a self-employed person can set against turnover instead of claiming expenses (gov.uk). It is an either-or choice: a business that claims the trading allowance cannot also claim allowable expenses or capital allowances for the same trade (gov.uk).

The maths is straightforward once the choice is framed correctly. The trading allowance wins where real expenses are below £1,000, because the business gets a £1,000 deduction for costs it did not actually incur. Where genuine expenses exceed £1,000, claiming actual expenses produces the larger deduction and the trading allowance should be left aside (gov.uk). Where trading income for the year is £1,000 or less, the income is fully covered by the allowance and there may be no need to register for Self Assessment at all (gov.uk).

Employing staff and the cost of a first hire

Wages are one of the most valuable allowable expenses, and they matter most at the point a growing sole trader takes on their first employee. Staff salaries, employer National Insurance, employer pension contributions and subcontractor payments are all allowable business expenses that reduce taxable profit (gov.uk). Taking on an employee also brings a new obligation, because the business must operate PAYE and report pay to HMRC in real time, which is a different discipline from self-employment record-keeping (gov.uk).

The true cost of a hire is more than the headline salary, because employer National Insurance at 15% on pay above the Secondary Threshold and pension contributions sit on top (gov.uk). A sole trader sizing up a first hire can model the full cost with the Moonworkers UK salary calculator, which applies the current PAYE and National Insurance rules to any gross salary.

Once staff are on the books, running compliant payroll becomes part of the business, and many sole traders move to HMRC-recognised payroll software for sole traders or a wider SME payroll platform rather than attempting it by hand. Where a business pays subcontractors in construction, the Construction Industry Scheme adds a further layer of deduction and reporting on top of ordinary expense rules.

Keeping records and Making Tax Digital

Every expense claim rests on records. HMRC requires a self-employed person to keep records of all business income and costs, and to retain them so that a Self Assessment return can be backed up if the return is checked (gov.uk). Digital or paper records are both acceptable at present, but that is changing.

Making Tax Digital for Income Tax introduces mandatory digital record-keeping and quarterly updates to HMRC, replacing the single annual return for those in scope (gov.uk). The rules are phased in by income level, as the table below shows, so a self-employed person needs to know which wave applies to them.

Once in scope, a business must keep its records in MTD-compatible software and submit quarterly updates followed by a year-end declaration, so the option of totalling receipts once a year into HMRC's online form ends for affected taxpayers (gov.uk). A sole trader who understands the difference between employment and self-employment record-keeping, covered in the comparison of PAYE and Self Assessment, is better placed to adapt to the digital regime.

Conclusion

Claiming expenses when self-employed comes down to a few disciplined habits: apply the wholly and exclusively test to every cost, apportion anything with a private element, and pick the method, cash basis or traditional accounting, simplified or actual, that produces the larger legitimate claim. The trading allowance simplifies the smallest businesses out of expense records entirely, while capital allowances give larger equipment its own route to relief.

The direction of travel is towards digital, real-time record-keeping, and the phased arrival of Making Tax Digital for Income Tax from 6 April 2026 will make good bookkeeping a monthly rather than an annual task. A sole trader who keeps clean digital records, and who understands the additional payroll obligations that arrive with a first employee, will find both the tax return and the transition to quarterly reporting far less daunting.

Frequently asked questions

What expenses can a self-employed person claim without receipts?

Simplified expenses can be claimed without keeping receipts for the underlying costs, because they use flat rates: 45p per business mile for the first 10,000 miles in a car or van, and £10, £18 or £26 a month for working from home depending on hours (gov.uk). The £1,000 trading allowance can also be claimed with no expense records at all. For everything else, HMRC expects records to support the claim (gov.uk).

Is it better to claim the £1,000 trading allowance or actual expenses?

The trading allowance is better only where genuine business expenses are less than £1,000, because it gives a £1,000 deduction for costs that were not actually incurred (gov.uk). Where real expenses exceed £1,000, claiming actual expenses produces the larger deduction. The two cannot be combined for the same trade, so it is one or the other in any given year.

Can a self-employed person claim for working from home?

Yes. A self-employed person working at least 25 hours a month from home can claim a monthly flat rate of £10, £18 or £26 depending on hours worked, or instead apportion actual household costs by rooms and time for a potentially larger claim (gov.uk). The flat rate covers heating, lighting and power but not phone or internet, which are claimed separately on their business-use share.

How do expenses work when a sole trader takes on staff?

Wages, employer National Insurance, employer pension contributions and subcontractor payments are all allowable expenses that reduce taxable profit (gov.uk). Taking on an employee also means operating PAYE and reporting pay to HMRC in real time, a separate obligation from self-employment bookkeeping (gov.uk). The full cost of a hire includes the 15% employer National Insurance and pension on top of salary.