Business expenses explained

Every expense you legitimately claim reduces your tax bill, so understanding what counts is one of the highest-value skills a small business owner can learn. This guide covers the categories, the rules, and a simple system for keeping track.

The categories of business expense

• Cost of sales — materials, stock, packaging, subcontractor labour
• Running costs — rent, rates, utilities, insurance, software, stationery, subscriptions
• People — wages, pensions, training (for a limited company with employees)
• Marketing — advertising, website, hosting, business cards, events
• Travel — mileage, fuel, trains, hotels for business trips (not ordinary commuting)
• Professional services — accountancy, bookkeeping, legal, banking
• Capital items — computers, tools, furniture (claimed through capital allowances rather than as an annual expense)

The two rules that matter

1. Wholly and exclusively — the cost must be entirely for your business. Personal items never qualify.
2. Business proportion — for shared costs (home office, phone, broadband, car), claim only the business share, using a fair method or HMRC’s simplified flat rates.

What’s not claimable

• Personal living costs — your food shop, clothes, holidays
• Ordinary commuting between home and your workplace
• Business entertaining — client meals and events generally can’t be claimed (except staff entertaining in some cases)
• Fines, penalties and most legal defence costs
• Capital purchases as a plain annual expense (capital allowances instead)

Home office — the practical version

If you work from home, you have two options:

• Simplified expenses — HMRC’s flat rate per month based on hours worked from home (no records of bills needed)
• Actual costs — work out the business proportion of rent/mortgage interest, energy and broadband

Compare both; the flat rate is simpler, but actual costs are sometimes higher.

Vehicle expenses

Track either actual costs (fuel, insurance, maintenance, the business share of purchase) or use the simplified mileage rate — 45p per mile for the first 10,000 business miles, 25p after. Keep a mileage log with dates and destinations; it’s the most common record HMRC asks to see.

A simple expense system

You don’t need to be an accountant. Three habits keep it manageable:

1. Log expenses weekly — into a spreadsheet or accounting app, with date, amount, category and a note
2. Keep evidence — a photo of the receipt or a digital copy, filed by month
3. Separate accounts — a business bank account and a business card make logging trivial

Spending 15 minutes a week on this saves hours at year end and makes your Self Assessment return accurate. Read our business bookkeeping basics guide for the full system.

See the tax impact

Deduct your expenses properly and the self-employed tax calculator will show the difference they make to your income tax and NI bill.