What are allowable expenses?

What makes an expense allowable?

The phrase is wholly and exclusively. A cost passes if it was incurred for the purposes of the trade and nothing else. Stock, materials, tools, business insurance, professional fees, advertising, business travel and the software you run the business on all pass without argument.

Where a cost is genuinely shared — a phone, a car, a room at home — you claim the business proportion, and keep a note of how you worked it out. HMRC expects a reasonable method applied consistently, not a stopwatch.

What fails the test is anything with a private purpose: ordinary clothes, client entertaining, fines, your own drawings or salary as a sole trader, and the commute to a regular place of work. These are not grey areas; they are simply not allowable.

A worked example

A mobile hairdresser turns over £38,000 in the tax year. Her costs are products £6,200, business insurance £320, an accountant £400, and a phone contract of £480 of which she reasonably estimates 60% is business use, giving £288.

She drove 8,000 business miles in her own car. At the flat mileage rate of 45p per mile, the claim is £3,600, which covers fuel, insurance, servicing and depreciation together.

Total allowable expenses are £10,808. Her taxable profit is £38,000 less £10,808, or £27,192, and it is that figure — not turnover — that income tax and National Insurance are worked out on at the current rates on gov.uk.

What is never allowable?

• —Client entertaining — meals, drinks, hospitality — however business-like the conversation.
• —Everyday clothing, even if you only wear it for work. Uniforms and protective gear are different.
• —Fines and penalties, including parking tickets picked up on a job.
• —Travel between home and a regular place of work.
• —The cost of buying a car, which goes through capital allowances instead.
• —Money you take out of the business for yourself.