Is investments and ISAs
tax deductible?

No. Money you put into an ISA, savings, shares or other investments is not an expense: it is your money moved from one place to another (GOV.UK). ISAs have their own tax advantage: up to £20,000 a year can be saved or invested free of Income Tax and Capital Gains Tax on the returns (GOV.UK).

Putting money aside is sensible, and some sole traders ask whether investing their profits reduces their tax. It does not. Profit is taxed when it is earned, whatever you do with it afterwards. What you can do is choose tax-efficient homes for savings, such as an ISA or a pension.

Is investments and ISAs tax deductible?

The HMRC rule

Money taken from the business for personal use, savings and investments, loan capital repayments and your own tax are not expenses. Some have their own relief elsewhere on the tax return. The rule comes from Expenses if you’re self-employed, Individual Savings Accounts (ISAs).

Only costs incurred wholly and exclusively for the business are allowable (expenses overview), and money saved or invested is not a cost at all. GOV.UK explains that you can save or invest up to £20,000 a year in ISAs, and do not pay tax on interest, dividends or gains from them (how ISAs work).

When you can claim it

• Save or invest up to £20,000 a year in ISAs, tax-free.
• Get tax relief on pension contributions through the scheme and your return.
• Use the personal savings allowance on interest outside an ISA.
• Set money aside for tax in a savings account.

When you cannot

• Deduct ISA payments from business profit.
• Deduct share purchases or investments.
• Deduct money moved to a savings account for tax.
• Deduct investment losses from trading profit.

What to claim instead

Put money aside for your tax bill in a separate savings account as you are paid; interest on it is savings income. For long-term saving, compare an ISA, which gives tax-free growth and withdrawals, with a pension, which gives relief on the way in.

How to decide if you can claim it

1. Was it for the business? A cost is only allowable if you incur it wholly and exclusively for the business. If it also serves a personal purpose that cannot be separated, such as clothing that keeps you warm or a meal that keeps you going, HMRC disallows it.
2. Is part of it personal? Where a cost has a business part you can identify, such as the business calls on a phone bill or the business miles in a car, you claim that part and leave the rest out, on a reasonable basis you can explain.
3. Is it a running cost or something you keep? It is not a cost of running the business at all, so the accounting basis makes no difference: it never goes in your expenses, although it may have a relief of its own elsewhere on the return.
4. Is there a specific rule? For investments and ISAs, the deciding rule is payments that are not business costs: money taken from the business for personal use, savings and investments, loan capital repayments and your own tax are not expenses. Some have their own relief elsewhere on the tax return.

Worked example: saving from profits

A web developer makes £45,000 of profit and puts £8,000 into a stocks and shares ISA and £6,000 into a savings account for her tax bill. Her taxable profit is still £45,000. Growth in the ISA is tax-free, and interest on the savings account is covered by her personal savings allowance.

Profit is taxed when earned

Your tax is based on your profit for the year, whatever you do with the money. Saving it, investing it or spending it personally makes no difference to the tax on your trading profit.

ISAs

You can put up to £20,000 a year into ISAs, across cash, stocks and shares, innovative finance and Lifetime ISAs. Interest, dividends and gains are tax-free, and nothing goes on your tax return. A Lifetime ISA adds a 25% government bonus on up to £4,000 a year, within the £20,000.

Pensions

Pension contributions get tax relief on the way in: the provider adds basic-rate relief, and higher-rate taxpayers claim more through their return. They are not business expenses, but they reduce your Income Tax.

Business savings

Interest on a business savings account is savings income, not trading income. It is covered first by the personal savings allowance and the starting rate for savings, where available.

Paying from the business account

Sole traders often pay personal costs from the account they use for the business. That is allowed, but the payment is drawings, not an expense. Record it that way so it does not end up in your expense totals. If your accounts do include it, the full self-employment pages have a disallowable column, box 45 for other expenses, where the same amount is added back.

Money for your tax bill

Setting aside a percentage of every payment for tax is one of the most useful habits for a sole trader. The transfer is not an expense, but it makes sure the money is there on 31 January and 31 July.

Lending money to the business

Putting your own savings into the business is capital introduced, not income, and taking it out again is drawings. Neither is an expense.

Where it goes

Investments go nowhere on the business pages. Interest and dividends outside an ISA go on the relevant sections of your return; gains may need reporting for Capital Gains Tax.

Where it goes on your return and in MTD

It is not an allowable expense, so it does not reduce your profit. Where your bookkeeping shows it as a business payment, record it as drawings, or include it and add it back as a disallowable expense on the full self-employment pages.

If your turnover was under £90,000, you can use the short self-employment pages (SA103S), which ask for a single figure for total allowable expenses rather than a box-by-box breakdown, and the full pages let you give just a total in box 31 too. The category still matters for your own records and for Making Tax Digital, where each quarterly update uses the same categories unless you choose to send one consolidated figure.

The accounting basis changes when a cost counts. On the cash basis, the default for sole traders since 2024/25, it counts when you pay it; on traditional accounting, when you incur it, with things you keep claimed through capital allowances.

How much an allowable cost saves

An allowable expense does not come back to you in full: it reduces your profit, so it saves tax at your marginal rate. For a sole trader in England, Wales or Northern Ireland that is 26p in the pound at the basic rate (20% Income Tax plus 6% Class 4 National Insurance) and 42p at the higher rate. The sole trader tax calculator works out the figure for your own profit.

What £1,000 of allowable expense saves a sole trader in 2026/27

• Basic rate (20% + 6%)£260
• Higher rate (40% + 2%)£420
• Additional rate (45% + 2%)£470
• Allowance taper band (60% + 2%)£620

Records to keep

You do not need business records for personal costs. If a personal payment was made from the business account, record it as drawings so it is excluded from your expenses. Keep policy documents, statements and receipts in your personal records, because some of them matter for your tax return in other ways.

If Making Tax Digital for Income Tax applies to you (qualifying income over £50,000 from April 2026, £30,000 from April 2027 and £20,000 from April 2028), the records must be digital, and each quarter's costs go into a quarterly update. Check your date with the MTD requirement checker.

Common mistakes

• Treating money saved for tax as an expense.
• Deducting investments from profit.
• Declaring ISA income on the return.

Related expenses

This item sits in the other business expenses category, alongside art and collectibles, care home fees, charity donations, clothing and workwear, cryptocurrency, fines and penalties, funeral costs and furniture. The A to Z of expenses answers the same question for every other cost.

If you record your costs in TapTax, each one lands in the HMRC category it belongs to, with its receipt attached, so your quarterly updates and year-end return use the same figures.