What Are Allowable Expenses? Self-Employed Definition

The difference between turnover and taxable profit is your expenses — and getting that figure right is the single biggest lever a sole trader has over their tax bill. Claim too little and you overpay; claim things that are not allowable and you risk a correction or penalty. The governing test is deceptively simple but strictly applied.

The "Wholly and Exclusively" Test

HMRC's rule is that an expense is allowable only if it is incurred wholly and exclusively for the purposes of the trade. A graphic designer's software subscription passes easily. A lunch you would have eaten anyway does not, even if you discussed work. Where a cost is genuinely split — a mobile phone used for both calls to clients and to family — you claim only the business proportion, and you must be able to justify how you arrived at it.

Typical allowable categories include:

• Office costs — stationery, phone, internet, software, postage.
• Premises costs — rent, utilities, or a fair proportion of home running costs if you work from home.
• Travel — fuel, train fares, parking, and mileage in your own vehicle (but not ordinary commuting).
• Stock and materials — goods for resale and raw materials.
• Professional services — accountancy, legal fees, and trade subscriptions.
• Marketing — website, advertising, and free samples.
• Insurance and financial costs — business insurance, bank charges, and interest.

What You Cannot Claim

Some costs feel business-related but are specifically disallowed: client entertaining, parking or speeding fines, your own wages or drawings, everyday clothing, and the purchase price of long-lived assets like a laptop or van. Those assets are not ignored — they go through capital allowances instead, often giving full relief in the year of purchase via the Annual Investment Allowance.

A Worked Example: Freelance Profit in 2025/26

Maya is a freelance copywriter with £42,000 of invoiced income in 2025/26. Her business costs for the year are:

Her taxable profit is £42,000 − £4,800 = £37,200. After the £12,570 Personal Allowance, she pays 20% income tax on £24,630 (£4,926) plus Class 4 National Insurance. Without claiming her £4,800 of expenses she would have been taxed on the full £42,000 — costing roughly £960 more in income tax alone. Use the sole trader calculator to see the effect of your own expenses.

Actual Costs vs Simplified Expenses

You can choose between two methods for some costs. The actual-cost method totals your real receipts. The alternative, simplified expenses, uses HMRC flat rates — for example 45p per mile for the first 10,000 business miles, or a fixed monthly amount for working from home. Simplified rates cut paperwork but are not always more generous; for a high-mileage or high-overhead business, actual costs often win. You can mix methods across categories but must use one consistent approach within each.

Allowable Expenses Under Making Tax Digital

From April 2026, sole traders with income above £50,000 must keep digital records and submit quarterly updates of income and expenses through compatible software. The categories of allowable expense do not change, but the rhythm does: instead of tallying everything once a year, you record costs as you go. Good digital habits now make that transition painless.

Related terms

• Sole trader tax calculator — see how expenses reduce your tax.
• Simplified expenses — HMRC flat rates as an alternative to actual costs.
• TapTax blog — practical guides on what you can and cannot claim.