Personal vs Business Expenses: What Sole Traders Can Claim

A business expense is a cost of running the trade that HMRC allows to be deducted from income before tax is calculated. A personal expense is a cost of private life, and it cannot be deducted. For UK sole traders the test is whether the cost was incurred wholly and exclusively for the business. Where a cost serves both purposes, only the business share can be claimed. This article explains the rule, shows how to split mixed costs, lists the categories used on the Self Assessment form and sets out how to keep records that stand up to an HMRC check.

TL;DR

• Only costs incurred for the trade are allowable. Money taken out of the business for personal use is not an expense.
• When a cost is part business and part private, only the identifiable business proportion can be claimed.
• Expenses are reported under the SA103 headings, such as goods, travel, staff, premises, office costs and professional fees.
• Receipts are not sent with the return, but the records must be kept in case HMRC asks for them.
• A separate business bank account and a note of each split make the separation much easier to prove.

Table of Contents

• The difference between personal and business expenses
• Costs that are clearly business
• Costs that are clearly personal
• Costs that are part business and part personal
• How the SA103 categories work
• The trading allowance and when expenses do not matter
• Keeping the two apart in practice
• Why this matters more under Making Tax Digital
• Our perspective
• Recording expenses with Ledgery
• Limited companies work differently
• FAQ
• Sources

The difference between personal and business expenses

GOV.UK describes allowable expenses as business costs that can reduce taxable profit. It states that allowable expenses do not include money taken from the business for personal use. A sole trader and the business are the same legal person, so the bank balance can blur the line. Even so, tax treats the two as separate.

HMRC’s Business Income Manual explains the legal basis. Revenue expenditure is generally allowable unless a rule prohibits it, but expenditure not incurred wholly and exclusively for the trade is denied by section 34 of ITTOIA 2005. In practice the question to ask of any cost is why it was incurred. If the answer is the trade, it is a candidate for a claim. If the answer is private life, it is not, whatever account paid for it.

The two types look like this:

• Business expenses: stock, materials, software used for work, business insurance, advertising, a professional subscription, travel to a client, the business part of a phone bill.
• Personal expenses: groceries, the family’s holidays, the owner’s own salary or drawings, ordinary clothes, the daily commute, and National Insurance contributions.

The 2025-26 notes to the short Self Assessment form confirm that the proprietor’s own salary or drawings, National Insurance contributions, entertaining and depreciation are not allowable.

Costs that are clearly business

GOV.UK lists the main groups of costs that can be claimed against income. They include office costs, business travel, uniforms, staff costs, stock or raw materials, insurance, bank charges, premises costs, advertising, and professional subscriptions and training related to the trade. Each must still pass the business-purpose test.

Travel is a common area for questions. HMRC says allowable travel can include vehicle insurance, repairs, servicing, fuel, parking, hire charges, licence fees, breakdown cover, public transport, hotels and meals on overnight business trips. Fines, penalties, non-business journeys and ordinary home-to-work travel cannot be claimed. Mileage can be claimed by flat rate as well as by actual cost, and the method chosen affects the records needed. The mileage allowance guide for the self-employed sets out the approach.

Costs that are clearly personal

Some costs fail the test outright. The 2025-26 notes to the full Self Assessment form name several that are disallowable in the stated circumstances: client entertaining, non-business work, private goods, legal costs of buying property or major equipment, tax-dispute costs, depreciation and ordinary clothing.

Clothing is a frequent point of confusion. A uniform or protective clothing for the trade can be claimed. Everyday clothes cannot, even if they are bought only to wear to client meetings. The same reasoning applies to a personal gym membership, a family meal and a supermarket shop, which belong to private life however closely the day’s work is tied to them.

A further category is capital spending. HMRC separates recurring running costs from capital items. Under traditional accounting, capital purchases are not normally deducted as ordinary revenue expenses unless capital allowance rules apply. The SA103S notes add that under the cash basis, capital expenditure is generally an allowable expense unless specifically disallowed, but cars have separate rules. The choice between methods is covered in the guide to cash basis and accruals for sole traders.

Costs that are part business and part personal

Many real costs serve both purposes: a mobile phone, home broadband, a car, a room at home used as an office. HMRC guidance on apportionment says that any identifiable part or proportion of an expense incurred wholly and exclusively for trade purposes can be claimed. The whole cost is not automatically refused because part of it is private.

GOV.UK gives a simple example. A £200 annual mobile bill that includes £130 of personal calls and £70 of business calls allows a claim of £70, the business part only.

The split should rest on something that can be shown: an itemised bill, a mileage log, a diary of working hours. An estimate with no basis is hard to defend. ICAEW reports that HMRC has increased its focus on private-use adjustments and warns that failing to adjust mixed spending can lead to compliance checks and penalties.

Working from home

Two methods exist for the home. The first apportions actual costs. HMRC says fixed costs such as rent, council tax, mortgage interest, insurance and water rates may be apportioned by area and time where part of the home is set aside solely for trade. Running costs such as heating, lighting, cleaning and metered water should reflect actual usage.

The second is the optional flat rate. HMRC’s simplified rates are £10 a month for 25 to 50 hours of core business activity, £18 for 51 to 100 hours, and £26 for 101 hours or more. Simplified expenses are optional, available to sole traders and partnerships without corporate partners, with no business-income limit, and they also cover vehicles and private use of business premises.

The flat rate involves less record keeping. Actual costs can produce a larger claim when a dedicated room is used full time. Either way, the hours or the floor area used should be written down at the time.

How the SA103 categories work

Expenses are reported under set headings on the Self-Employment pages of the Self Assessment return. There are two versions. The short form suits simpler businesses, and the full form gives more detail.

For 2025-26, the short form lists goods for resale or goods used, car, van and travel, staff, premises, repairs, professional fees, interest and financial charges, office costs, and other allowable expenses. Where annual turnover is below £90,000, the form allows total expenses to be entered in a single box instead of completing the whole expense section. Box 12 is for car, van and travel costs after the private-use proportion has been removed.

The full form reports expenses in boxes 17 to 30. These cover goods for resale, construction subcontractors, staff, car, van and travel, rent, rates, power and insurance, repairs, office costs, advertising and business entertainment, loan interest, financial charges, irrecoverable debts, professional fees, depreciation or asset-sale profit or loss, and other business expenses. Boxes 32 to 45 are used for disallowable amounts included in those headings, and box 46 totals them.

The notes to the full form state that private-use portions of premises, goods, staff work, office costs, finance costs and other expenses must be excluded or entered as disallowable amounts in the relevant box.

Matching everyday costs to a category

The table shows where common costs usually belong, with the personal element that has to come out.

The table is a guide. The final choice rests on the facts of the cost and the notes to the current form.

The trading allowance and when expenses do not matter

A sole trader whose gross trading income is small may claim the £1,000 trading income allowance instead of deducting costs. The SA103S notes state that a trader who does so cannot also deduct allowable expenses or claim other allowances against that income. If actual costs are above £1,000, claiming them is normally the better route. If they are below, the allowance may suit better. Property owners have a similar choice, described in the guide to the property income allowance for landlords.

Keeping the two apart in practice

The law does not require a separate business bank account for a sole trader. It does make the separation simpler. TaxAid recommends keeping private and business finances separate, preferably with a separate business bank account, and keeping a clear record of any cost that is partly business and partly private. The trade-offs are covered in the article on whether a sole trader needs a separate bank account.

A workable routine has five parts:

1. Pay business costs from the business account where possible.
2. Photograph each receipt on the day it is issued.
3. Give each item a category that matches an SA103 heading.
4. For mixed costs, record the split and the reason for it, such as the business percentage of a phone bill.
5. Review the month’s entries before the quarter closes.

GOV.UK says allowable expenses for the tax year are totalled and reported on the return, and that receipts do not need to be submitted, but records and evidence must be kept in case HMRC asks. A spreadsheet can hold this information at first. The point at which it stops being practical is discussed in the article on spreadsheets and accounting software.

Why this matters more under Making Tax Digital

Under Making Tax Digital for Income Tax, income and expenses are recorded digitally and sent to HMRC in quarterly updates. Each quarter needs correct categories, so a personal cost left in the business records affects more than one filing. The Making Tax Digital guide for sole traders and landlords explains who is affected and what the updates contain. Relevant dates are listed in the Self Assessment deadlines guide.

Our perspective

Most errors in expense claims come from timing, not intent. A receipt is bought on a Tuesday, sorted on a Sunday three months later, and by then nobody remembers whether the lunch was a client meeting or a sandwich.

We built Ledgery around that gap. A photo of the receipt is scanned by AI and filed at once, so the date, amount and supplier are captured while the purchase is fresh. Income and expense records are stored in one place, and the quarterly update for HMRC is generated from them.

We also treat the personal and business line as a records question. Bank feeds through Open Banking bring in transactions as they happen, which makes personal items easier to spot and leave out. Records can be exported or shared with an accountant, and the user stays in control of what is filed.

Ledgery supports sole trader and property income. It does not support limited companies or VAT. For those who earn over £50k and have the most to gain from tidy quarterly records, we think one platform for receipts, records and filing is the simplest route.

The Ledgery Team

Recording expenses with Ledgery

Ledgery is income tax software for UK sole traders and property owners. It scans receipts, stores income and expense records, creates invoices, sets deadline reminders and produces quarterly updates for HMRC. The first quarter is free, and a monthly or annual subscription follows on the Simple, Grow or Pro plan. Details are on the Ledgery site.

The software does not decide what is allowable. The rules above still apply, and an accountant can advise on borderline items. The aim is to have each receipt and its category on record before the quarterly update is due. The cost of professional help for the annual return is described in the guide to self assessment accountant fees.

Limited companies work differently

The rules above are for sole traders. A limited company is a separate legal person, and personal spending paid from company funds is treated differently, for example through a director’s loan account. GOV.UK’s sole trader guidance has its own section for limited companies. Ledgery does not support limited companies, so this article does not cover their expense rules.

FAQ

What is the difference between personal and business expenses?

A business expense is a cost incurred wholly and exclusively for the trade, and it can reduce taxable profit when allowable. A personal expense is a cost of private life, such as food, ordinary clothes or the daily commute. Money taken from the business for personal use is not an allowable expense.

Can a sole trader put personal expenses through the business?

No. Personal costs cannot be deducted, and drawings are not an expense. If a cost is mixed, the business share can be claimed and the personal share cannot. Claiming private costs risks a compliance check and penalties.

How should a sole trader categorise expenses for HMRC?

Expenses are grouped under the SA103 headings, such as goods, car, van and travel, staff, premises, office costs and professional fees. Each is entered after the private-use portion is removed. Below £90,000 turnover, the short form allows one total for expenses.

Do receipts need to be sent to HMRC?

No. Receipts are not submitted with the return. The records and evidence must be kept in case HMRC asks to see them.

Can the home be claimed as a business cost?

Yes, in part. A sole trader can apportion actual home costs by area and time, or use HMRC’s optional flat monthly rates based on hours worked. Records of hours or room use should be kept either way.

Sources

• Expenses if you’re self-employed: Overview, GOV.UK
• Expenses if you’re self-employed: Car, van and travel, GOV.UK
• BIM37005, Wholly and exclusively, HMRC
• BIM42115, Apportionment of expense, HMRC
• BIM47820, Use of home, HMRC
• BIM75010, Simplified expenses: use of home, HMRC
• BIM75001, Simplified expenses: introduction, HMRC
• Self-employment (short) notes 2025-26, HMRC
• Self-employment (short) SA103S 2025-26, HMRC
• Self-employment (full) notes 2025-26, HMRC
• Self-employment (full) SA103F 2025-26, HMRC
• Help with self-employment on your Self Assessment tax return, GOV.UK
• More tax return tips for sole traders, ICAEW
• Income, expenses and profit explained, TaxAid

Recommended

• Separate Bank Account for a Sole Trader: Do You Need One?
• Cash vs accruals: HMRC guide for UK sole traders
• Making Tax Digital guide for sole traders and landlords
• Mileage allowance for the self-employed: 2026/27 guide