Tax-Deductible Expenses Explained
Tax-deductible expenses are costs incurred in running a business that can be deducted from income when calculating taxable profit. By reducing taxable profit, allowable expenses reduce the amount of income tax or corporation tax a business pays.
For an expense to be tax-deductible, it must be incurred wholly and exclusively for the purposes of the trade. This fundamental rule is set out in the Income Tax (Trading and Other Income) Act 2005 for sole traders and the Corporation Tax Act 2009 for companies.
The “Wholly and Exclusively” Rule
An expense is deductible if it is incurred wholly and exclusively for business purposes. If an expense has both a business and a personal element, the personal portion is not deductible. However, where an expense can be clearly apportioned between business and personal use, the business portion may be claimed.
For example, if you use your mobile phone 70% for business and 30% for personal calls, you can claim 70% of the cost as a deductible expense.
Common Deductible Expenses
Office and Premises Costs
- Rent and business rates
- Utilities (gas, electricity, water)
- Office insurance
- Security costs
- Cleaning and maintenance
- Repairs (but not improvements — see below)
Working from Home
If you work from home, you can claim a proportion of household costs. HMRC allows two approaches:
| Method | Details |
|---|---|
| Simplified expenses | Sole traders and partnerships claim a flat monthly rate based on hours worked at home: £10 for 25 to 50 hours, £18 for 51 to 100 hours and £26 for 101 hours or more |
| Actual costs | Calculate the proportion of household costs attributable to business use based on rooms and time |
Staff Costs
- Salaries, wages, and bonuses
- Employer National Insurance contributions
- Pension contributions
- Staff training directly related to the business
- Recruitment costs
- Temporary staff and subcontractor costs (subject to CIS in construction)
Travel and Subsistence
- Business travel costs (public transport, taxis, flights)
- Mileage allowance for business journeys in a personal vehicle
- Hotel accommodation for business trips
- Meals during overnight business travel
- Parking and congestion charges for business journeys
Not deductible: Travel between home and a regular place of work (commuting), and meals during a normal working day at a fixed workplace.
Mileage Rates
| Vehicle Type | First 10,000 miles | Above 10,000 miles |
|---|---|---|
| Cars and vans | 55p per mile | 25p per mile |
| Motorcycles | 24p per mile | 24p per mile |
| Bicycles | 20p per mile | 20p per mile |
Professional Services
- Accountancy fees
- Legal fees for business matters (not capital items or disputes with HMRC)
- Professional subscriptions and memberships
- Trade body membership
Marketing and Sales
- Advertising and promotion
- Website hosting and domain names
- Business cards and stationery
- Trade exhibitions and events
- Client entertainment is not deductible for tax (though it may be a legitimate business expense in the accounts)
Financial Costs
- Bank charges and interest on business loans
- Credit card charges
- Bad debts that are written off
- Hire purchase interest (not the capital element)
- Insurance premiums (professional indemnity, public liability, contents)
Clothing and Uniforms
- Protective clothing required for the job
- Uniforms and branded workwear
- Costumes for performers
Not deductible: Ordinary clothing, even if worn exclusively for work, and conventional business attire.
Capital Expenditure vs Revenue Expenditure
It is important to distinguish between revenue and capital expenditure:
- Revenue expenditure (day-to-day running costs) is deductible as a business expense
- Capital expenditure (assets with lasting benefit) is not deductible as a business expense but may qualify for capital allowances
Examples
| Expenditure | Type | Treatment |
|---|---|---|
| Repairing a broken window | Revenue | Tax-deductible expense |
| Replacing single glazing with double glazing | Capital | Capital allowance |
| Painting and decorating | Revenue | Tax-deductible expense |
| Building an extension | Capital | Capital allowance |
| Replacing like-for-like equipment | Revenue | Tax-deductible expense |
| Buying new machinery | Capital | Capital allowance |
Capital assets can often be claimed through the Annual Investment Allowance, which allows businesses to deduct up to £1 million per year of qualifying capital expenditure.
Expenses for the Self-Employed
Self-employed individuals claim expenses through their self-assessment tax return. HMRC offers two methods:
Traditional Accounting
Record all actual business income and expenses. This gives the most accurate picture but requires detailed record keeping.
Simplified Expenses
Available only to sole traders and partnerships (not limited companies), simplified expenses use flat rates for certain costs:
| Expense | Flat Rate |
|---|---|
| Business use of home | £10/month (25-50 hours), £18/month (51-100 hours), £26/month (101+ hours) |
| Business mileage | 55p/mile (first 10,000), 25p/mile (thereafter) |
| Living in business premises | Deduct personal use at flat rate per occupant |
Expenses for Limited Companies
Limited companies claim expenses in their Corporation Tax return (CT600). Directors who incur expenses personally can be reimbursed by the company, and the reimbursement is tax-deductible for the company.
Key differences from self-employment:
- Director salaries are a deductible expense for the company
- Employer NIC on salaries is deductible
- Pension contributions made by the company are deductible (subject to the annual allowance)
- Client entertainment remains non-deductible, but staff entertainment up to £150 per head per year is deductible (and tax-free for the employee)
Expenses Not Deductible
The following are generally not deductible for tax purposes:
- Capital expenditure (claim capital allowances instead)
- Client and supplier entertaining
- Fines and penalties (including parking fines and HMRC penalties)
- Personal expenses, even if paid from a business account
- Donations to political parties
- Everyday clothing
- The cost of forming a company (though this can be amortised)
- Legal costs of acquiring capital assets (forms part of the capital cost)
VAT on Expenses
If you are VAT-registered, you generally reclaim the VAT on business purchases through your VAT return. In this case, the expense is recorded net of VAT in your accounts.
If you are not VAT-registered, the VAT-inclusive amount is the deductible expense.
Some items have restricted VAT recovery (such as cars and client entertainment), even for VAT-registered businesses.
Record Keeping
HMRC requires businesses to keep records of all income and expenses for at least:
- 5 years after the 31 January filing deadline (self-employed)
- 6 years from the end of the accounting period (companies)
Records should include:
- Purchase invoices and receipts
- Bank and credit card statements
- Mileage logs for business travel
- Records of any apportionment between business and personal use
Maintaining proper accounting records throughout the year is far easier than reconstructing them at year end. Digital record keeping is becoming mandatory under Making Tax Digital, making good habits even more important.
Common Mistakes
- Not claiming everything you are entitled to — many businesses miss legitimate expenses
- Claiming personal costs as business expenses — HMRC can impose penalties for this
- Not keeping receipts — without evidence, HMRC can disallow the expense
- Confusing capital and revenue expenditure — this affects both the timing and method of relief
- Claiming entertainment — a common error, as it feels like a business cost but is specifically disallowed