How do expenses work?
Every business comes with some sort of running costs. By keeping track of these expenses you can reduce the amount of tax you need to pay to HMRC.
Your expenses will not be refunded, but they can make a sizeable dent in your tax bill. For example, if you make £30,000 a year and claim £10,000 in allowable expenses, you will only pay tax on the remaining £20,000, known as taxable profit.
If you need to make big purchases for your business, like equipment or vehicles, you may be able to claim capital allowances. These are calculated separately.
HMRC grants every taxpayer a £1,000 tax-free trading allowance, meant to cover income from casual work and personal sales. You cannot claim expenses or capital allowances if you use your trading allowance.
Costs you can claim as allowable expenses
There are a great many purchases you can claim as business expenses. As a rule of thumb, expenses that are specifically for business use and are either recurring or will not last longer than two years are allowable.
HMRC lists seven categories of expenses:
- Office, property and equipment
- Goods for resale
- Marketing and subscriptions
- Legal and financial
Let’s take a look at each category in more detail.
Office, property and equipment
You can claim expenses for rent of premises, utilities, business rates, property insurance and purchases that you do not expect to last longer than two years (for example, business cards).
Your office expenses might include:
- Phone and Internet bills
- Repairs and property maintenance (skirtings, floorings, walls, office furniture)
- Professional printing services
- Printer ink and cartridges
- Computer software, for example, an Adobe Creative Cloud subscription
- Using your home as an office, but only the part used for business
Items you cannot claim expenses for include:
- Purchasing business premises
- Equipment like computers or sound gear (these fall under capital allowances)
- Non-business use of resources, like personal phone calls or the rest of your home
Goods for resale
If you run a retail business or manufacture goods to sell, you can claim stock, raw materials and the direct costs of producing your goods (for example, your electricity bill if you run a home baking business).
Marketing and subscriptions
You can claim allowable business expenses for marketing costs like advertisements, website hosting and free samples. Professional body memberships and trade journal subscriptions are also allowable.
A common misconception is that you can claim expenses on client dinners and entertainment. These do not count as marketing, but paying through a business bank account often works out cheaper because the balance is not subject to income tax.
If you need to travel regularly for work, you may be able to claim expenses.
Examples of acceptable travel expenses include:
- Vehicle hire
- Vehicle insurance
- Repairs and services
- Fares on air travel, public transport or taxis
- Hotel rooms
- Meals on overnight business trips
If you purchase a vehicle, you will need to claim capital allowances. If you use your own vehicle for business, you can claim expenses on the portion that is directly business-related.
You cannot claim for your daily commute from home to the office, but you can claim on supply runs, deliveries and meetings outside the office. If you are a driver, you can count all journeys except for your personal commute.
Clothing that you buy specifically for your business, such as uniform, protective wear or costumes (for actors and entertainers), count as allowable business expenses. You can also claim the cost of cleaning and repairs.
Clothes that are purchased for resale are counted as stock. Everyday clothing does not count, even if you wear it to work.
You can count the costs associated with staff—such as salaries, bonuses, pensions, subcontractors, agency fees and employer’s National Insurance—as business expenses. Domestic help, for example, hiring a cleaner or childminder while you work, is not included.
Staff events like Christmas parties are also covered, but there is an annual allowance of £150 per employee.
Legal and financial costs
Many of the financial costs of running a business are allowable expenses. These include:
- Financial products and charges
- Bank charges
- Interest on business loans
- Business insurance of any kind
- Hiring accountants, solicitors, surveyors or architects
You cannot claim for:
- Repayments of loans, overdrafts or other finance
- Fines incurred by breaking the law
- The legal costs of buying property and machinery (these fall under capital allowances)
If a client doesn’t pay you but you have included their work in your turnover, you may be able to list bad debt as an expense. In order to do this, you must be sure that they will not pay. You will also need to calculate an accurate figure for the debt; you can’t estimate it as a percentage of your income.
Using simplified expenses
Simplified expenses are flat rates that you can use instead of calculating the exact costs of some resources. For example, if you work from home, it may be tricky to work out the exact proportion of rent and utilities to claim back. HMRC’s simplified expenses allow you to multiply a flat rate by the number of hours you work.
Simplified expenses can be used by sole traders or business partnerships that have no companies as partners. Limited companies cannot use them.
Using simplified expenses doesn’t preclude you from claiming other costs back, and it doesn’t cover every expense. You’ll need to claim other expenses, like equipment and marketing, in the usual way.
Working from home
If you work at least 25 hours from your home, you can claim a flat monthly expense that scales with the number of hours. For example, if you work over 100 hours from home in a month, you can claim £26 for that month. Find your bracket on GOV.UK.
The flat rate doesn’t include phone or internet expenses; you can claim for those costs on top of it.
Mileage on vehicles
Instead of working out insurance, repairs, servicing and fuel, you can multiply mileage by HMRC’s flat rate. This varies based on the type of vehicle and the total number of miles. Find your flat rate here.
People living on the premises
If you run an accommodation business where you live, such as a bed and breakfast, you can subtract an amount for your personal use of the premises.
This is based on the number of people who use it as their home and is calculated monthly. For example, if you live in a guesthouse with your partner and children, you can claim £650 per month. Find out more.
Costs you can claim as capital allowances
If you use traditional accounting, claim capital allowances when you buy something you keep to use in your business, for example:
- Business vehicles
For more on this, read our article Capital allowances: What are they and how do I claim them?.