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Allowable expenses for sole traders: A complete guide

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As a sole trader in the UK, understanding which expenses are allowable for tax purposes is crucial. Claiming the correct expenses can reduce your taxable profit, leading to significant tax savings. This guide provides an in-depth look at allowable expenses, HMRC guidelines, and tips to maximise your tax deductions.

What are allowable expenses?

Allowable expenses are the expenses that have been included in the profit and loss account and are also allowable for tax purposes. This means that the sole trader will get a tax deduction for these expenses. 

Contact the the GOV.UK Self Assessment helpline if you’re not sure whether a business cost is an allowable expense.

The two rules you need to know

There are specific rules relating to some items such as entertaining, fines and legal expenses but the two general rules to be aware of are as follows:

‘Wholly and exclusive’

1. Expense must be ‘wholly and exclusive’ for business use. This means that the expense must have been incurred by a business purpose for a business purpose and there is no private benefit.

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Where an expense is incurred and there is a mix of business and personal use, if you are able to apportion on a reasonable basis then the business portion is allowable, e.g motor expenses, as these can be apportioned on a mileage basis.

Where there is mixed use (both business and private) and it is not possible to apportion on a reasonable basis, then the whole cost is disallowed e.g a gym membership which includes the gym facilities and occasional networking events. 

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Revenue expenditure

2. Expenditure must be revenue, not capital in nature. Capital expenditure is deemed to be items purchased in the business which provide an ‘enduring benefit’ to the business.

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In other words, you expect to use for the long term; two years or more. Revenue expenditure is the day-to-day expenditure.

Examples of allowable expenses include:

  • office costs
  • travel costs
  • clothing expenses
  • staff costs
  • things you buy to sell on
  • financial costs 
  • costs of your business premises
  • advertising or marketing. 

 

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Common allowable expenses for sole traders

Here are some typical expenses that sole traders can claim:

  • Office costs: This includes stationery, postage, printing, and computer software subscriptions necessary for your business operations.
  • Travel expenses: Costs such as fuel, vehicle insurance, train fares, and parking fees incurred for business travel are allowable. However, commuting between your home and regular place of work is not deductible.
  • Clothing expenses: Protective clothing required for your work, such as safety boots or uniforms, is allowable. Everyday clothing, even if worn for work, is not deductible.
  • Staff costs: Wages, salaries, bonuses, pensions, and other employee benefits are allowable expenses.
  • Stock and materials: The cost of goods bought for resale and raw materials used in production can be deducted.
  • Business premises costs: Rent, utilities, business rates, and maintenance costs for your business premises are allowable. If you work from home, you can claim a proportion of your home expenses, such as heating, electricity, and internet costs.
  • Advertising and marketing: Expenses related to advertising your business, including website costs, social media promotions, and print advertising, are deductible.

Which expenses are disallowable?

Most of the expenses that a business incurs meet the ‘wholly and exclusive’ test and are therefore allowable. Items such as staff wages, materials, business travel, postage etc do not cause a problem. Let’s now look at the areas that may contain disallowable expenditure and the reasons why.

  • Repairs and renewals

    Repairs and renewals will be only allowable if they are revenue in nature. This means that they are day-to-day expenses and they are not enhancing or improving an asset – i.e. not making the asset more valuable. If they enhance or improve, then the cost is treated as capital. The full cost will not be deductible immediately (usually) but capital allowances may be available. Speak to a professional about the availability of the annual investment allowance (AIA).

  • Legal costs

    Expenditure will only be allowable if it is related to the day-to-day business activity e.g the legal costs in chasing bad debts. Expenditure relating to personal activity such as legal costs to defend personal reputation and legal costs associated with fines and penalties are disallowed. Legal costs in relation to the purchase of capital items are disallowed, but once again capital allowances may be available.

  • Entertaining

    The cost of entertaining clients is disallowed but the cost of entertaining employees is allowable (although be careful you don’t entertain them too much as they may attract a benefit, which will be taxable on the employee and attract national insurance).

  • Donations

    Charitable donations are generally disallowable as are political donations. Local donations made for the the purpose of the trade i.e. no private benefit to the owner may be allowable. In practice, you will need to prove here that there is a business purpose for making the donation.

What are simplified expenses?

Simplified expenses are a way of calculating some of your business expenses using flat rates instead of working out your actual business costs. The aim is to ease the administration burden on small business.

You don’t have to use simplified expenses. You can decide if it suits your business.

You can use simplified expenses if:

  • You use your car for business (you would need to keep a record of the number of business miles)
  • You use part of your home for business use (e.g. a workshop or an office)
  • You use your business premises for home (e.g. you live above a pub).

Can I use simplified expenses?

You can use simplified expenses if you are a sole trader or a partner in a partnership (as long as all of the partners are individuals). Simplified expenses can’t be used by limited companies or business partnerships involving a limited company.

If you use simplified expenses, you will note this on your tax return.

How to claim sole trader expenses?

You will claim all of your allowable expenses on your self assessment tax return.

You are able to break down the types of expenses as part of your return or you may be able to use the ‘three line account’ method which is simpler if your turnover is below the VAT registration threshold (currently at £90,000).

The ‘three line account’ method is a simple way of giving details of your income and expenses to HM Revenue & Customs (HMRC).

Checklist: Record keeping for sole traders

It is vital that books and records are kept safely as there are rules surrounding how long business records must be stored for. Information that you will need to keep to prepare your accounts can be found below. Login to save this checklist to your profile for future use – as you work through the list, any checkboxes that are ticked or unticked will be automatically saved to your profile. (To register to join and enjoy the benefits of membership click on the link at the top right of the page. It will only take a few minutes to create your profile.

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Tips for maximising your tax deductions

  • Separate business and personal finances: Use a dedicated business bank account to simplify tracking your business expenses.
  • Regularly update records: Set aside time weekly or monthly to update your financial records, ensuring nothing is overlooked.
  • Understand HMRC guidelines: Familiarise yourself with HMRC’s rules on allowable expenses to ensure compliance and maximise your deductions.
  • Consider Simplified expenses: HMRC offers flat rates for certain expenses, such as vehicle use and working from home, which can simplify your calculations.

Frequently asked questions (FAQs) about sole trader expenses

By understanding and correctly claiming allowable expenses, sole traders can effectively reduce their taxable profit and optimise their tax position. Always ensure your claims are accurate and supported by proper documentation to comply with HMRC regulations.

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Further Reading

Read more on simplified expenses if you're self-employed on GOV.UK's website

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