What is the wholly and exclusively rule for sole traders?

An expense is allowable only if it was incurred wholly and exclusively for the purposes of your trade. If an expense has both a business and a personal element, you can only deduct the business proportion — and only if that proportion can be identified separately. Costs that are inherently dual-purpose (like ordinary clothes you wear to work) are not allowable at all.

Can I claim expenses if I use the cash basis?

Yes. Under the cash basis (the default since April 2024), you deduct allowable expenses when you pay for them, not when you receive the invoice. Most expenses are deductible in the same way as under accruals accounting. The main difference is that capital items like equipment and vehicles are claimed through capital allowances (with cars being an exception — they qualify for capital allowances even under the cash basis), and you cannot deduct capital repayments on loans.

What is the difference between allowable expenses and capital allowances?

Allowable expenses are day-to-day running costs — things you consume or use up within a year, like stationery, phone bills, and rent. Capital allowances are deductions for longer-lasting assets you buy for your business, like equipment, machinery, and vehicles. You claim capital allowances instead of deducting the full cost as an expense, spreading the deduction over several years (or using the Annual Investment Allowance to deduct the full cost immediately for most plant and machinery).

Should I claim the £1,000 trading allowance or actual expenses?

It depends on which gives you the bigger deduction. If your actual expenses are less than £1,000, claim the trading allowance — it's simpler and gives a bigger deduction. If your actual expenses are more than £1,000, claim actual expenses instead. You cannot do both. See our trading allowance guide for the full comparison.

How long do I need to keep expense records?

You must keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year. For the 2025/26 tax year (deadline 31 January 2027), you need to keep records until at least 31 January 2032. HMRC can ask to see receipts, invoices, bank statements, and mileage logs during this period.

Allowable Expenses for Sole Traders: What You Can Claim (and What You Can't)

If you’re a sole trader, allowable expenses are the single biggest lever you have to cut your tax bill. Every legitimate pound you claim reduces your taxable profit — and at the 2026/27 combined rate of 26% (20% income tax plus 6% Class 4 National Insurance) on profits between £12,570 and £50,270, every £100 of expenses saves you £26 in tax.

But HMRC doesn’t let you deduct everything. There’s one test every expense must pass, a list of categories that qualify, and a separate list of things that look like business expenses but aren’t. This guide covers the framework, links out to detailed guides for each expense type, and flags the common mistakes that trigger HMRC investigations.

For the strategic view — which deductions to prioritise and how they stack — see our reduce your Self Assessment tax bill guide. This article is the practical reference: what counts, what doesn’t, and how to claim it. For a complete walkthrough showing these expenses on a filled-in return, see our Self Assessment tax return example.

1. The one test every expense must pass

Every allowable expense must satisfy the “wholly and exclusively” rule, set out in HMRC’s Business Income Manual (BIM45000). The test has two parts:

Wholly — the expense must be incurred entirely for your business. If part of the cost is personal, you can only deduct the business proportion, and only if that proportion can be identified separately.
Exclusively — the expense must not have any private purpose. If a cost inherently serves both business and personal needs (like ordinary everyday clothes), it fails the test entirely — even if you mainly wear them for work.

The rule is strict but not unreasonable. A box of printer paper for your office passes. A suit for client meetings fails (you could wear it to a wedding). A dedicated business phone line passes. Your personal mobile contract fails unless you can identify the business calls separately.

The key distinction is apportionable dual-purpose vs inherent dual-purpose. If you can split the cost on a reasonable basis (like business-use percentage of a phone bill), the business portion is deductible. If the expense is inherently both business and personal with no way to separate them, nothing is deductible.

2. Cash basis or accruals: which expenses can you claim?

Since 6 April 2024, the cash basis is the default accounting method for sole traders and partnerships. There is no longer a turnover limit — businesses of any size can use it. You only need to actively opt out if you want to use accruals (traditional) accounting.

The difference matters for when you claim:

Method	When you deduct expenses	When you record income
Cash basis (default)	When you pay the supplier	When you receive the money
Accruals (opt-in)	When you receive the invoice	When you invoice the customer

Under the cash basis, if you receive a £2,000 invoice in March 2026 but pay it in May 2026, you claim the expense in your 2026/27 return, not 2025/26. Under accruals, you’d claim it in 2025/26.

Most expenses are deductible under either method. The key differences:

Capital allowances: Under the cash basis, most capital items (equipment, machinery) are deducted in full when you pay for them, rather than through capital allowances. Cars are the exception — they still use capital allowances even under the cash basis. See our car expenses guide for the detail.
Interest: The old £500 cap on interest deductions under the cash basis was abolished in 2024/25. Loan and finance interest is now deductible in full if incurred wholly and exclusively for the trade.
Losses: Cash basis losses can now be set against other income or carried back, matching accruals treatment.

Under Making Tax Digital, your accounting method determines how your quarterly updates report income and expenses. For most sole traders, the cash basis is simpler and more natural. See our MTD cash basis vs accruals guide for how this works under MTD.

3. The full list of allowable expense categories

Here are the categories HMRC recognises as allowable for sole traders. Each links to a detailed guide where one exists.

Day-to-day running costs

Office costs — stationery, phone bills, postage, printing, software subscriptions
Premises costs — rent, business rates, utilities, insurance for your business premises (not your home — see below)
Travel and subsistence — hotel bills, meals on business trips, train tickets, parking (but not your daily commute — see section 10)
Stock and materials — raw materials, goods bought for resale, packaging
Financial costs — bank charges, business insurance, professional indemnity insurance, interest on business loans
Marketing and advertising — website hosting, ads, business cards, SEO, social media tools
Professional fees — accountant fees, legal fees for business matters, consultancy (but not fines or penalties — see section 10)
Staff costs — wages, employer’s National Insurance, pension contributions for employees, training costs
Training — courses and qualifications directly related to your current business (not training for a new career — see section 10)

Capital items (claimed via capital allowances or cash basis deduction)

Equipment and machinery — computers, tools, machinery, office furniture
Vehicles — cars, vans, motorcycles (see our car expenses guide for the specific rules)
Business premises — the building itself (if you buy rather than rent)

Under the cash basis, most equipment and machinery is deducted in full when you pay for it. Under accruals, you’d use the Annual Investment Allowance (AIA) — currently £1 million — to deduct the full cost of most plant and machinery in the year of purchase. Cars are excluded from the AIA regardless of method.

4. Vehicle costs: mileage rate or actual costs

Sole traders have two completely different ways to claim vehicle costs, and you can’t switch between them for the same vehicle. The flat mileage rate (55p per mile for the first 10,000 business miles from April 2026, 25p above that) covers all running costs including depreciation. The actual costs method lets you claim fuel, insurance, servicing, and capital allowances on the purchase price — but requires more record-keeping.

The choice is irrevocable for each vehicle, so it’s worth calculating both options before committing. The break-even is typically around 50-55p per actual mile.

For the full comparison, worked examples, and the electric car first-year allowance rules, see our car expenses guide.

5. Working from home: flat rate or actual costs

If you work from home, you can claim a portion of your household running costs — heating, electricity, council tax, mortgage interest, internet, and phone. There are two methods:

Simplified expenses (flat rate based on hours worked at home): £10/month for 25-50 hours, £18/month for 51-100 hours, £26/month for 101+ hours. Simple, but caps at £312/year.
Actual costs (business proportion of real bills): requires calculation but can be worth significantly more if you have a dedicated office room and high utility bills.

The flat rate doesn’t include phone or internet — you claim the business proportion of those separately under either method. If you own your home and use a room exclusively for business, there are capital gains tax implications to consider when you sell.

For the full breakdown, worked examples, and the CGT warning, see our working from home expenses guide.

6. Software, apps and subscriptions

Software subscriptions are allowable expenses if they’re wholly and exclusively for your business. This includes:

Bookkeeping and accounting software (Xero, QuickBooks, FreeAgent (10% off with this link), Coconut)
MTD-compatible software — the subscription cost is deductible as an allowable expense under HMRC’s BIM35805 and BIM46450 guidance
Cloud storage, project management tools, design software
Website hosting and domain renewal

If you use software for both business and personal purposes (like a personal Microsoft 365 subscription you also use for work), only the business proportion is deductible. For the specific rules on MTD software costs, see our MTD software costs guide.

7. Record-keeping: what HMRC actually needs

HMRC does not require you to keep receipts in a specific format, but they do require you to keep sufficient records to support your expense claims. This means:

A receipt or invoice showing the date, supplier, amount, and description of what you bought
Bank statements or card transactions that match the receipts
A mileage log if you use the flat mileage rate (date, purpose, miles)
Evidence of business-use proportion for apportioned expenses (like a phone bill with itemised calls)

You must keep these records for at least 5 years after the 31 January filing deadline for the relevant tax year. Under Making Tax Digital, you’ll need to keep digital records in MTD-compatible software — see our spreadsheets for MTD guide for what counts.

For the specific question of whether you need an invoice for every expense (and what HMRC accepts instead), see our invoice requirements guide.

8. Does it matter which card you pay with?

No. HMRC doesn’t care whether you use a personal credit card, a personal debit card, or a business bank account to pay for a business expense. What matters is whether the expense itself passes the wholly and exclusively test — not which card processed the payment.

Sole traders are not legally required to have a separate business bank account (unlike limited companies). If you use a personal card, you just need to keep the receipt and record the expense in your bookkeeping. If you later reimburse yourself from a business account, that’s a transfer, not a new expense.

For the full explanation and how to record mixed-card transactions in your bookkeeping, see our personal card for business expenses guide.

9. The £1,000 trading allowance: expenses or allowance?

If your total business income (before expenses) is £1,000 or less, you don’t need to declare it or pay tax on it. If your income is above £1,000, you have a choice:

Claim the £1,000 trading allowance as a flat deduction instead of actual expenses — no receipts needed, no record-keeping
Claim actual expenses — requires receipts but gives a bigger deduction if your costs exceed £1,000

You cannot do both. If your actual expenses are less than £1,000, the trading allowance wins. If they’re more, actual expenses win. The choice is made on your tax return each year. Use our trading allowance vs expenses calculator to compare both methods and see which saves you more.

For the full comparison and worked examples at different income levels, see our trading allowance vs expenses guide.

10. What you can’t claim

These are the expenses that look like business costs but fail the wholly and exclusively test:

Your daily commute — travel from home to your regular workplace is personal, not business. Only travel between clients, to temporary workplaces, or on business errands counts.
Ordinary everyday clothes — even if you wear them for work. Uniforms, protective clothing, and costumes for performers are deductible; suits and normal office wear are not.
Client entertainment — meals, drinks, and events for clients are not deductible for sole traders (limited companies can’t deduct them either, but can cover the cost from pre-tax profits in some cases).
Fines and penalties — parking tickets, speeding fines, late filing penalties. Even if incurred during business activity, HMRC does not allow them.
Training for a new career — courses that prepare you for a new trade or profession are not deductible. Training that updates skills in your current business is.
Personal living expenses — your own food, rent, clothing, holidays. Even if you work while on holiday, the holiday cost is personal.
Non-business phone use — the personal portion of your phone bill. You can only claim the identified business calls or a reasonable business-use proportion.
Domestic costs that don’t change — if working from home doesn’t increase your bills (e.g., you already paid council tax and rent before starting the business), those base costs aren’t deductible under the actual costs method. Only the additional cost attributable to business use counts.

The bottom line

Allowable expenses are the simplest way to reduce your sole trader tax bill, but the rules are specific. The wholly and exclusively test is the gateway — if an expense doesn’t pass it, no amount of record-keeping will make it deductible. If it does pass, keep the receipt, record it in your bookkeeping, and claim it.

For the strategic view of how expenses stack with other tax-reduction levers (pensions, Gift Aid, capital allowances), see our reduce your Self Assessment tax bill guide. For the practical side of getting your records MTD-ready, see our MTD readiness checklist.

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