Every pound you spend running your business that qualifies as an allowable business expense reduces your taxable profit, and therefore the tax you pay. Getting this right is one of the simplest ways to keep more of what you earn while staying on the right side of HMRC. This guide explains the rules that decide whether a cost is allowable, the expenses most businesses can claim, the traps to avoid, and how to keep records that stand up to scrutiny. For the bigger picture, start with our business expenses and deductions hub.
The wholly and exclusively rule
The single most important test in UK tax law is whether a cost was incurred wholly and exclusively for the purposes of the trade. If an expense is genuinely business-related and has no private element, it is generally allowable. If any part of it serves a personal purpose, the rule becomes more complicated.
This principle applies across Income Tax for the self-employed and, in a similar form, to Corporation Tax for limited companies. The phrase appears throughout HMRC guidance, so it is worth committing to memory: a cost is only deductible if it is spent wholly and exclusively to earn business profits.
Common allowable expenses
Most trading businesses incur a familiar set of running costs. Typical allowable expenses include:
- Cost of goods, raw materials and stock bought for resale
- Staff costs such as salaries, employer National Insurance and pension contributions
- Premises costs including rent, business rates, heating, lighting and insurance
- Travel and subsistence on genuine business journeys, plus accommodation when working away
- Office costs such as stationery, postage, phone and broadband used for business
- Professional fees for accountants, solicitors and other advisers
- Marketing and advertising, including a business website
- Bank charges, interest and finance costs on business borrowing
- Software and subscriptions used to run the business
In your bookkeeping, each of these costs is posted to its own nominal code; for example, business journeys are recorded against travel expenses in the chart of accounts.
Working from home? See our guide to claiming home office costs for the simplified and actual-cost methods.
Disallowable costs
Some expenditure is specifically disallowable, even where it feels business-related. You cannot deduct:
- Client entertaining and hospitality
- Fines and penalties for breaking the law, including most parking fines
- Your own drawings, salary or dividends as a business owner
- The private proportion of any mixed-use cost
- Ordinary commuting between home and a regular workplace
- Everyday clothing, even if you only wear it for work
Recognising what falls outside the rules is as valuable as knowing what you can claim, because over-claiming is a common trigger for an HMRC enquiry.
Capital versus revenue spending
The tax system treats revenue expenditure and capital expenditure differently:
| Type | What it covers | How relief is given |
|---|---|---|
| Revenue | Day-to-day running costs that are used up quickly | Deducted in full against profit in the year |
| Capital | Assets with a lasting benefit, such as equipment or vehicles | Relief usually via capital allowances |
You generally cannot deduct the cost of a long-lived asset as a normal running expense. Instead you claim capital allowances, which spread or accelerate the relief depending on the asset and the scheme available. Our guide to capital allowances explained covers how this works in practice.
Dual-purpose expenses
A dual-purpose expense serves both business and private aims. The classic example is a mobile phone used for work and personal calls, or a car driven for both business trips and family use.
Where a cost can be split fairly into business and private parts, you can usually claim the business proportion. The key is a reasonable, consistent and evidenced apportionment — for example, the percentage of mileage that is business travel, or the share of home running costs attributable to a work room. Keep a record of how you arrived at the figure so you can justify it later. For vehicle costs specifically, our guidance on mileage and travel claims explains the flat-rate and actual-cost options.
Record keeping requirements
You cannot claim what you cannot evidence. HMRC expects you to keep complete and accurate records of income and expenses, including:
- Receipts, invoices and bank statements
- A clear note of the business purpose where it is not obvious
- The apportionment method for any mixed-use costs
Records must usually be kept for several years after the relevant filing deadline, and under Making Tax Digital more businesses are required to keep digital records and submit updates using compatible software. Good habits now save stress later — see our guide to record keeping for expenses and the wider Making Tax Digital and software hub.
Differences for sole traders and companies
The wholly and exclusively principle applies to both structures, but the detail differs:
- Sole traders claim allowable expenses on their Self Assessment return, reducing profits chargeable to Income Tax. Many can choose the simpler cash basis, where income and expenses are recorded when money actually moves.
- Limited companies deduct expenses when calculating profit for Corporation Tax and prepare accounts under UK GAAP, often FRS 105 for micro-entities filed at Companies House. A clearer line is drawn between company and personal money, so director expenses must be genuine business costs reimbursed correctly.
If you are weighing up your structure, our self-employed and sole traders hub and moving from sole trader to limited company guide are good next reads.
Claiming correctly
To make the most of allowable expenses without overstepping:
- Apply the wholly and exclusively test to every cost.
- Separate capital spending and claim it through capital allowances.
- Apportion dual-purpose costs fairly and keep your workings.
- Record everything promptly, ideally in MTD-ready software.
- Reconcile expenses against your bank and VAT records before filing.
Done well, claiming the right expenses is not aggressive tax planning — it is simply paying the correct amount of tax. For VAT-specific treatment, see our tax and VAT guides.