What are allowable expenses?
Allowable expenses are business running costs that can be deducted from income to work out taxable profit, provided they are incurred wholly and exclusively for the business.
What allowable expenses means
The basic test is that a cost must be incurred wholly and exclusively for the purposes of the trade. Where a cost has both a business and a private element, such as a phone or a car, you can usually claim the identifiable business part.
Common allowable expenses include stock and materials, office costs and stationery, business travel, staff costs, rent and utilities for business premises, insurance, accountancy and legal fees, marketing, bank charges and training that updates existing skills.
Not allowable: client entertaining, fines and penalties, everyday clothing, commuting, and private living costs. Equipment and other capital purchases are handled through capital allowances rather than as day-to-day expenses, except for sole traders using the cash basis.
Example
A sole trader photographer has income of £42,000 in 2026/27.
| Expense | Amount |
|---|---|
| Equipment insurance | £600 |
| Editing software subscriptions | £360 |
| Mileage, 3,000 business miles at 55p | £1,650 |
| Phone, 60% business use of £480 | £288 |
| Accountancy fees | £900 |
| Total allowable expenses | £3,798 |
| Taxable profit | £38,202 |
At the basic rate, those expenses save her about £760 in income tax and around £228 in Class 4 National Insurance.
Allowable expenses for companies
Limited companies follow the same wholly and exclusively rule. They can also deduct salaries and employer pension contributions for directors, which sole traders cannot do for themselves. Costs a company pays that benefit a director personally, such as private medical insurance, are deductible for the company but may create a taxable benefit for the director, reported on a P11D.
Pre-trading costs incurred in the seven years before a business starts can also be claimed, as if spent on the first day of trading.
Why it matters for your business
Every allowable expense you miss means paying more tax than you need to. Sole traders can also use simplified expenses, such as flat monthly rates for working from home based on hours worked, instead of calculating actual costs. If your expenses are very small, the £1,000 trading allowance may be better than claiming them.
Keep receipts and records: at least five years after the 31 January filing deadline for sole traders, and six years for companies. Cloudkeepers reviews clients' expenses each year to make sure nothing is missed.
Common questions
Only clothing that is a uniform, protective equipment or a costume needed for a performance. Everyday clothes, including smart clothes you wear only for work meetings, are not allowable, because they also give you the private benefit of being clothed.
You need records that would satisfy HMRC if it asked, which in practice means receipts, invoices or bank records showing what was bought and why. Digital copies are fine. For mileage, keep a log of journeys rather than fuel receipts.