Tax deductible expenses for UK businesses: what can you claim and what's not allowed?
If you’re self-employed as a sole trader, you can deduct expenses to reduce your tax bill.
Expenses, also known as ‘allowable expenses’, are basically the costs of running a business. Things like office, travel and staff costs.
You’ll need to work out your allowable expenses before paying income tax and national insurance. This means keeping track of them throughout the tax year, so you can take away your total expenses from your turnover to get your taxable profit. This is the amount you’ll actually pay tax on.
Getting clued up on what HMRC considers an allowable expense can save you money and keep you compliant with tax rules.
Read on to learn what counts as an allowable expense, and how Making Tax Digital for Income Tax (MTD) changes the way expenses are reported.
But first, a quick heads-up: we can’t give you tax or financial advice. If you need help with that, it’s best to chat with a financial adviser.
How MTD affects expenses
MTD changes how you report income and expenses to HMRC, it doesn’t change what expenses are allowable for income tax purposes. HMRC's current guidance on allowable business expenses still applies.
The main shift is moving from paper receipts to digital software. With MTD, you keep digital records throughout the year and send quarterly updates using HMRC-recognised software.
The benefit? Using digital software makes it easier to keep track of business expenses as you spend. Take our MTD software, for example, which lets you categorise transactions on the go, take photos of receipts and attach them to the right payment. With some Monzo Business plans, you can even set aside money for tax automatically.
And here's the best part – it's free to file income tax straight from Monzo to HMRC.
Save on tax by claiming business expenses
If you’re a sole trader, allowable business expenses can reduce your tax bill, often by quite a bit.
Say your turnover is £80,000 and you claim £20,000 in allowable expenses, your tax will be calculated based on the remaining £60,000 (taking into account any further allowances or reliefs you’re entitled to). That's a chunk of money saved for running your business.
The key is knowing which expenses qualify and keeping accurate records throughout the year. That's where good habits and the right tools make all the difference.
Just remember: any money you take from your business for personal use isn’t an allowable business expense to reduce your taxable profit.
List of allowable expenses
You can claim tax relief on lots of business costs – as long as they’re only for your business. Here are the main categories.
Office costs: things like stationery, phone bills, and postage. If you regularly work from home, you might be able to claim a portion of your utility bills too. HMRC has written this guidance on what home-working costs you can and can’t claim, which is worth checking out if you work from home regularly.
Travel costs: like fuel, parking, train or bus fares for business trips. Your regular commute to a permanent workplace doesn't count, but trips to meet clients or suppliers do.
Clothing expenses: you can claim for uniforms or protective clothing that you need specifically for work. Your everyday clothes don't qualify, even if you only wear them for work.
Staff costs: salaries, bonuses, pension contributions, and staff training if you have employees.
Things you buy to sell on: stock and raw materials that you use to create products or provide services.
Costs of your business premises: rent, utilities, and maintenance for your workspace.
Advertising or marketing costs: website fees, online ads, printed flyers, and promotional materials.
Training courses: that help you improve skills directly related to your business.
Where an expense has both a personal and business purpose, you can claim for the relevant business proportion if can be separately identified.
For a full list of the most common expenses you can claim, visit HMRC’s website.
Does it matter if I use the cash basis or not?
Yes, it can make a difference.
The cash basis is a simpler way to run your accounts. You only record money when it actually moves. So, you record:
income when you’re paid (not when you send the invoice)
expenses when you actually pay them.
If a customer pays you late, you don’t count that money until it hits your account. It’s now the default method for most sole traders.
The other option is traditional accounting (also called the accruals basis). With this method:
you record income when you’ve done the work — even if you haven’t been paid yet
you record expenses when you’re billed — not when you pay
if you keep stock, you also need to account for what you’ve used during the year, not just what you’ve bought
The method you choose affects when income and expenses show up in your accounts, which can change your tax bill.
The cash basis is usually easier to manage. You can often deduct equipment costs straight away, but there are limits on things like loan interest. If you’re not sure what’s right for you, it’s a good idea to speak to an accountant or financial adviser.
Pension contributions
Contributions to your own pension work a bit differently. They're not a business expense but you might be able to claim additional tax relief on personal pension contributions you make through your annual declaration or self-assessment return.
How Monzo Business helps
Monzo Business allows you to categorise expenses so it's easier to filter out allowable expenses when the time comes. You can snap receipts, add custom categories, and see exactly where your money's going, making tax time much less stressful.
How to track allowable expenses
MTD makes this easier. And with Monzo Business, you can track expenses as you spend.
Put every transaction into a category and mark it as allowable if it's a business expense. Snap a photo of the receipt and attach it to the transaction. That way, all your records are in one place, ready when you need them.
“It's just one less thing that you've got to think about.”
- Emily, licensed home dog boarding business owner, on Monzo’s MTD tool
You can also connect other business accounts through open banking, giving you a complete picture of your finances.
How to claim business expenses
As part of MTD, you keep records of your business expenses throughout the year. Tell HMRC about your allowable expenses in your end of year tax return as normal.
The difference is that you use digital software (like Monzo’s built-in MTD tool, powered by Sage) to send quarterly updates, so by the time you reach your final submission, you'll already have everything organised.
What can I claim as tax deductible?
Can I deduct my home office expenses?
If you work from home regularly, you might be able to claim some of your home office costs and reduce your tax bill. There are two ways to do it. You can either:
claim a share of your actual home costs (based on how much of your home you use for work)
use HMRC’s simplified flat rates
There are a few rules to watch out for, so it’s worth checking HMRC’s guidance or speaking to an accountant if you’re not sure.
Can I deduct my daily commute?
You can’t claim the cost of your normal commute to your usual workplace. But if you’re travelling for actual business reasons – like visiting clients, suppliers, or heading to a shared office space – you can usually claim for these.
Can I deduct my work clothes?
You can only claim clothing if it’s a uniform or specialist protective gear you need for your job. Everyday work clothes – even if you only wear them for work – don’t count.
What if I use my personal car for business?
You can claim for business mileage at HMRC's approved rates, or claim the actual costs like fuel, repairs, and insurance – but only the bit that relates to business use.
Can I deduct entertainment expenses?
Client entertainment is tricky – you generally can't claim the cost of entertaining clients or customers. But you can claim staff entertainment and training events.
Free MTD software is built into Monzo’s business accounts as standard. It’s recognised by HMRC too, so you can file tax straight from Monzo to HMRC. Apply for a free business bank account now to access the tool.
Making Tax Digital tool available for sole traders and landlords only. Only sole traders, limited company directors and landlords in the UK can apply for an account. Ts&Cs apply.