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Allowable business expenses must be incurred "wholly and exclusively" for business purposes. Deducting these costs from your total revenue reduces your taxable profit, effectively lowering your Corporation Tax bill. Common expenses include office rent, marketing, travel, and specific home-office costs.
As a small business owner, keeping track of expenses can feel like a constant juggling act. But many of those costs can be deducted from your business taxes, putting more money back into your pocket. Understanding what qualifies as a legitimate business expense is crucial to making running a business easier. While you don’t want to miss out on valuable deductions, you also need to avoid claiming personal costs.
What are business expenses?
Business expenses are the day-to-day costs of running a company. These expenses are essential for keeping operations running smoothly and enabling a business to generate revenue.
When you earn money, you don’t pay tax on the total amount. Instead, you subtract your "allowable expenses" first. You only pay tax on what is left—your taxable profit.
Essential vs. capital expenses
There are some essential expenses you'll likely encounter on a regular basis as a small business owner. These generally fall into two main categories, operating expenses and capital expenses.
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Operating expenses: These are the regular costs of doing business, like electricity, software subscriptions, and staff wages.
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Capital expenses: These are purchases of major assets like machinery, vehicles, or buildings. While these aren't "expenses" in the traditional sense, you can often claim them through Capital Allowances.
HMRC "Wholly and Exclusively" rule explained
This is the most important rule in UK business tax. For an expense to be "allowable," it must be incurred "wholly and exclusively" for the purpose of your trade.
In simple terms:
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Wholly: This refers to the amount. You can only claim the part of the cost that was for business.
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Exclusively: This refers to the reason. You must have bought the item only for your business.
While the rule sounds strict, it doesn't mean an expense must have zero personal benefit. If a personal benefit is merely incidental—such as the slight personal use of a business mobile phone—the expense is usually still claimable. However, if an expense has a "dual purpose" (like buying a suit for work that you also wear to weddings), HMRC will generally reject the claim unless the business portion can be clearly separated and apportioned.
What can small businesses claim as business expenses?
Knowing what is an allowable expense helps you save money and stay compliant. Use this table to check common items.
|
Expense item |
Claimable? |
Specific conditions |
|
Office rent |
Yes |
Must be for a dedicated business space. |
|
Business mileage |
Yes |
45p per mile for the first 10,000 miles (cars/vans). |
|
Uniforms |
Yes |
Must be branded (logo) or protective gear (PPE). |
|
Staff salaries |
Yes |
Includes wages, bonuses, and pension contributions. |
|
Advertising |
Yes |
Includes website hosting, SEO, and online ads. |
|
Accountancy fees |
Yes |
Fees for business tax and bookkeeping. |
|
Business insurance |
Yes |
Public liability or professional indemnity. |
|
Stationery |
Yes |
Pens, paper, and postage for business use. |
|
Software |
Yes |
Monthly subscriptions like Xero or Microsoft 365. |
|
Training courses |
Yes |
Must improve skills you already use for work. |
|
Client entertaining |
No |
Meals or tickets for clients are never deductible. |
|
Ordinary clothing |
No |
Even if you only wear it for work (e.g., a suit). |
|
Commuting |
No |
Travel between home and a permanent office. |
|
Fines/penalties |
No |
Parking fines or late tax penalties. |
|
Personal gym |
No |
Even if it keeps you fit for your job. |
|
Morning coffee |
No |
Standard daily caffeine is a personal cost. |
Travel, subsistence, and entertainment rules
Travel rules can be tricky, so keep these three points in mind:
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Travel: You can claim for trips to see clients or suppliers, but you cannot claim for your daily drive to your main office (commuting).
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Subsistence: You can claim for food and drink only when you are on a business trip that is outside your normal routine or involves an overnight stay.
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Entertainment: Treating a client to a meal or a drink is not an allowable expense. You can pay for it, but it won't reduce your tax bill.
How do I claim a business expense?
Claiming is a simple step-by-step process:
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Keep the receipt: Every claim needs a "proof of purchase." Digital photos of receipts are fine.
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Record the transaction: Enter the cost into your bookkeeping software or spreadsheet.
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Categorise it: Group your costs (e.g., "Marketing" or "Travel").
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Report on your tax return: Total these up and enter them into your annual Self Assessment or Corporation Tax return.
How to claim work-from-home expenses
If you work from home, you can claim a portion of your household bills like heating, electricity, and insurance on equipment. There are two ways to do this:
1. Simplified expenses (flat rate)
This is the easiest method. You claim a fixed monthly amount based on how many hours you work at home.
|
Hours of business use per month |
Flat rate per month |
|
25 to 50 |
£10 |
|
51 to 100 |
£18 |
|
101 and more |
£26 |
2. Actual costs
You calculate the exact percentage of your bills. A common way is to divide your total bills by the number of rooms you use for work and the time you spend working in them.
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Count your rooms: Note the total number of rooms in your home (excluding bathrooms and hallways).
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Assess work usage: For each room you work in, decide what percentage of time it is used for business versus personal use (e.g., 90% work, 10% personal).
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Total your costs: Add up your household running costs for the entire year.
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Calculate cost per room: Divide the total costs by the number of rooms in your home.
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Apply the work percentage: Multiply that "cost per room" by the percentage of time you use it for work.
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Finalise the claim: Add up these figures for all relevant rooms to find your total allowable expense.
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Keep it current: Reassess these steps every time you complete a tax return to ensure your claim stays accurate.
Best practices for your business record-keeping
Maintaining accurate and organised records is essential to protecting your business during an HMRC audit. To stay compliant and maximise your tax savings, follow these best practices:
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Organise and store your documentation properly: Keep all receipts, invoices, and records in a dedicated filing system (physical or digital). Make sure everything is backed up and stored in a secure location.
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Keep your records for at least 6 years: You are legally required to keep all business records, including receipts, invoices, bank statements, and payroll data, for 6 years from the end of the financial year they relate to.
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Leverage digital tools for efficiency: Use accounting software or expense apps (like Expensify or Concur) to snap photos of receipts and automatically categorise transactions. These tools simplify record-keeping and ensure you are ready for Making Tax Digital (MTD), which requires digital records and quarterly updates for many businesses starting in April 2026.
Some credit cards, like the Capital on Tap Business Credit Card, offer accounting integrations with software like Xero, QuickBooks, Sage, and FreeAgent, with automatic daily syncs. -
Strategically maximise your deductions: Review your records monthly to find overlooked claims and time major purchases towards the end of your tax year. Be sure to use the correct percentages for mixed-use items (like home internet) and take advantage of the £1 million Annual Investment Allowance for capital equipment.
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Seek professional advice when needed: Consult a qualified accountant to identify all eligible deductions, ensure your documentation is correct, and stay updated on changing tax laws. They can also represent you during an HMRC audit, giving you peace of mind that you are staying within the legal boundaries of UK tax law.
The bottom line
Claiming expenses is a powerful way to keep more of your hard-earned money while staying compliant. By following the "wholly and exclusively" rule and keeping tidy records, you can lower your tax bill safely and confidently. Taking control of your spending today—by choosing the right tools and staying organised—sets your business up for long-term success.
Frequently asked questions
Can I claim my morning coffee as an expense?
Generally, no. HMRC views your daily food and drink as a personal cost. You can only claim for coffee or meals if you are away from your usual place of work on a business trip.
Is clothing an allowable business expense?
Only if it is a uniform, protective gear (like steel-toe boots), or a costume. Regular "business wear" like suits or shoes cannot be claimed, even if you only wear them for meetings.
How do I calculate my home-office expenses?
You can either use HMRC’s flat monthly rates (based on hours worked) or calculate a fair proportion of your actual utility bills based on the rooms you use for business.
Which business records must I keep for 6 years?
You must keep all receipts, invoices, bank statements, and payroll records for at least 6 years. HMRC can ask to see these at any time to verify your tax returns.
This does not constitute financial or tax advice. For specific guidance on your business deductions, please consult a qualified accountant.