Small business tax deductions are the allowable costs HMRC lets you subtract from your income before your taxable profit is worked out — meaning you’re taxed only on what you actually keep, not on everything you bring in. Some of the costs you pay for work can be taken off your income before your taxable profit is worked out. These are known as small business tax deductions and can include things like office costs, travel, insurance, advertising and professional fees.
For example, if you earn £40,000 and have £10,000 in allowable expenses, your taxable profit could be £30,000. The important thing is to know which costs HMRC allows you to claim and which ones you cannot. Capital purchases also have different rules, so they may need to be claimed through capital allowances instead.
This guide explains 12 small business tax deductions that may apply during the 2026/27 tax year. It covers home working, phones, software, mileage, equipment, staff costs, marketing, finance costs and some less obvious deductions. The rules can differ between sole traders and limited companies, so check the treatment that applies to your setup before making a claim.
Sole Trader or Limited Company? A Quick Comparison
| Deduction area | Sole trader | Limited company |
|---|---|---|
| How it’s claimed | Deducted from income on your Self Assessment return | Deducted from company profit before Corporation Tax |
| Personal pension contributions | Not a business expense — claimed separately via personal pension tax relief | Can be paid as an employer contribution and treated as a company expense |
| Mileage | Simplified mileage rate or actual costs + capital allowances (not both) | Can use AMAP rates to reimburse a director/employee, or run the vehicle through the company |
| Home working | Simplified expenses or a reasonable proportion of actual costs | HMRC’s flat £26/month allowance for directors, or a formal licence/rental agreement for the space used |
2026/27 Allowance Rates at a Glance
Here are some important figures to know when looking at small business tax deductions for 2026/27:
| Allowance or rate | 2026/27 amount |
| Car or van mileage, first 10,000 miles | 55p per mile |
| Car or van mileage after 10,000 miles | 25p per mile |
| Motorcycle mileage | 24p per mile |
| Bicycle mileage | 20p per mile |
| Annual Investment Allowance | Up to £1 million |
| Trading Allowance | £1,000 |
| Home working simplified expense for 25 to 50 hours a month | £10 per month |
| Home working simplified expense for 51 to 100 hours a month | £18 per month |
| Home working simplified expense for 101+ hours a month | £26 per month |
The mileage rate for cars and vans increased from 45p to 55p for the first 10,000 miles from 6 April 2026. The £1 million Annual Investment Allowance also remains in place for 2026/27, subject to the usual qualifying conditions. All figures on this page are confirmed HMRC rates for the 2026/27 tax year — see HMRC’s Business Income Manual and mileage allowance rates pages for the source guidance.
Before You Claim Expenses: Consider the Trading Allowance
If your total income from self-employment is £1,000 or less before expenses, you may not need to claim individual expenses at all. HMRC’s Trading Allowance lets you deduct a flat £1,000 from your trading income instead of working out and claiming actual costs. It’s often simplest for very small or side-line businesses with low expenses, but if your genuine allowable costs are higher than £1,000, claiming actual expenses (as covered in this guide) will usually reduce your tax bill by more. You cannot use the Trading Allowance and claim actual expenses on the same income — it’s one or the other.
Everyday Running Costs
1. Home Office Costs
If you work from home as a sole trader, you may be able to claim a reasonable share of household costs such as heating, electricity, rent, Council Tax and internet use. You can calculate the actual business proportion based on your usage, or use HMRC’s simplified expenses method if you work at least 25 hours a month from home.
For simplified expenses, the monthly rates are £10 for 25 to 50 hours, £18 for 51 to 100 hours and £26 for 101 hours or more. These simplified rates cover heating, electricity, council tax and similar household costs; they do not include broadband or telephone, which must be claimed separately based on actual bills and business use. Limited company directors working from home can instead claim HMRC’s £26-a-month flat allowance directly from the company, tax-free, without needing receipts.
2. Mobile Phone & Broadband
A mobile phone, broadband connection or internet service used for your work can be included in your small business tax deductions. Where there is private use, you normally claim only the work‑related proportion of the cost. Broadband and telephone costs are claimed separately based on your actual bills and a reasonable estimate of business use.
Keep your bills and a reasonable record of how you have worked out the claim. This is particularly useful where one phone or internet connection is used for both work and personal activities.
3. Software & Subscriptions
Accounting software, cloud storage, design tools, website services and other software used for work can often be claimed. Regular software licence payments can qualify as ordinary expenses, while some longer-term software purchases may fall under capital allowance rules.
This is an important area for modern small firms because software costs can build up over the year. Keep invoices for each subscription rather than relying only on bank statements.
4. Business Insurance
Insurance taken out for your small business can be an allowable cost where it relates to the work. Examples can include professional indemnity, public liability and other policies needed for your trade.
For a sole trader, professional indemnity insurance is specifically listed by HMRC as a potential allowable expense. Limited companies can also normally deduct genuine insurance costs incurred for their trade.
Vehicles & Travel
5. Business Mileage
Mileage is one of the most useful small business tax deductions for people who travel for work. For 2026/27, the simplified rate for cars and vans is 55p per mile for the first 10,000 small business miles and 25p for each mile after that. Motorcycles qualify at 24p per mile.
For example, 8,000 qualifying miles would give a mileage deduction of £4,400 using the simplified rate. Carrying a colleague on a business journey adds a further 5p per mile per passenger, on top of your own rate. You should keep a mileage record showing the date, journey, reason and miles travelled.
Remember that you generally cannot use simplified mileage rates for a vehicle where you have already claimed capital allowances or actual running costs. Once you choose the simplified mileage method for a vehicle, you generally need to continue using it while that vehicle is used for the small business.
6. Travel, Accommodation & Subsistence
Genuine work travel can usually be claimed when the journey is for the small business rather than ordinary commuting. This can include train and bus fares, taxis, hotels, parking and other qualifying travel costs.
Meals and subsistence can also be relevant when travelling for work, subject to the rules and circumstances. Keep receipts and records showing why the journey was necessary.
Assets & People
7. Equipment & Capital Allowances
Computers, machinery and other equipment can qualify for tax relief, but they are not always treated like everyday expenses. Depending on your accounting method and the asset, you may need to claim capital allowances instead.
The Annual Investment Allowance is particularly useful because it can provide relief on qualifying plant and machinery expenditure up to £1 million. Spending above the AIA limit, or on assets that don’t qualify for it, may still get relief through Writing Down Allowances, claimed at a set percentage each year instead of all at once. Cars have separate rules, so do not assume that every asset receives the same treatment.
8. Staff Costs, Pensions & Training
If you employ staff, wages, employer National Insurance contributions, pension contributions, bonuses and some staff benefits can generally be deducted when they are incurred for the small business. Subcontractor costs may also qualify where they relate to the work.
Training can also qualify when it maintains or improves skills and knowledge used in your existing work. However, not every course qualifies, particularly training intended to help you move into a completely new area.
Growth & Admin
9. Marketing & Advertising
Marketing costs are another common group of small business tax deductions. You may be able to claim for advertising, website costs, promotional materials and free samples where they are used to promote your small business.
Keep invoices for online advertising platforms, website developers, printing and other promotional work. Client entertainment is different and is generally not an allowable deduction.
10. Professional Subscriptions & Journals
If you pay for a professional or trade subscription that relates to your work, the cost may qualify as an allowable expense. Trade journals and professional publications can also be included where they are relevant to your small business.
Professional fees can also qualify when they relate to the work, including fees paid to accountants, solicitors and other professional advisers. However, the cost of preparing and submitting your own Self Assessment return is not an allowable expense for a sole trader.
11. Bank Charges & Loan Interest
Bank charges, overdraft charges, credit card charges and interest on qualifying small business loans can be deductible. Hire purchase interest and certain leasing costs may also qualify.
The important point is that the interest or charge must relate to the small business. Repaying the capital amount of a loan is not the same as claiming the interest.
12. Often-Missed Deductions: Pre-Trading Costs, Bad Debts & R&D Relief
Some small business tax deductions are easy to miss because they do not appear as regular monthly costs.
Pre-trading costs: Certain revenue expenses incurred before you started trading can receive relief if they were incurred within the seven years before trading began and would have been allowable had they been incurred after trading started.
Bad debts: If you use traditional accounting, a trade debt that was included in turnover but has become genuinely irrecoverable may qualify for a deduction. This does not generally apply under cash basis accounting because income is only recorded when received.
R&D relief: A limited company carrying out qualifying research and development may be able to claim R&D tax relief. Sole traders and partnerships generally cannot claim R&D relief in the same way. The rules and rates depend on the type of claim and the company’s circumstances, so this is an area where professional advice can be useful.
How Making Tax Digital (MTD) Changes Expense Record-Keeping in 2026
Making Tax Digital for Income Tax starts to affect more sole traders and landlords from 6 April 2026. If your gross income from self-employment and property is above £50,000, you must use MTD for Income Tax from April 2026. The threshold falls to above £30,000 from April 2027 and above £20,000 from April 2028.
If you are required to use MTD, your records need to be kept digitally and your income and expenses must be submitted through compatible software. Quarterly updates summarise the information held in your digital records.
This makes good expense records even more important. Keep invoices, receipts, bank records and mileage information throughout the year rather than trying to recreate them before filing. HMRC says self-employed people must keep accurate records of income and expenses and retain proof of costs.
Common Mistakes That Can Cause Problems With HMRC
Knowing about small business tax deductions is useful, but claiming the wrong costs can create problems. Avoid these common mistakes:
1. Claiming Personal Costs
You can only claim the work-related part of a cost where there is private use. Do not claim the full amount of a phone, vehicle or household bill if part of it is personal.
2. Treating Capital Purchases as Normal Expenses
Equipment and machinery may need to be dealt with through capital allowances rather than ordinary expenses. Check the rules before entering a large purchase as a normal expense.
3. Using the Wrong Mileage Method
If you use simplified mileage rates, you cannot also claim the actual running costs for that vehicle. Keep a clear mileage log and use the correct 2026/27 rate.
4. Claiming Without Records
You do not normally send receipts with your tax return, but you must keep proof of your expenses in case HMRC asks for it. Accurate records also make it easier to prepare your return.
5. Claiming an Expense Just Because It Helps You Work
A cost being useful does not automatically make it deductible. The expense needs to meet the relevant tax rules and, for many sole trader costs, be incurred wholly and exclusively for the trade.
FAQs: Frequently Asked Questions
Can I claim my car as a small business expense?
It depends on how you use the car and your accounting method. A sole trader may use simplified mileage rates or, where appropriate, claim actual costs and capital allowances, but you cannot claim both methods for the same vehicle.
Do I need receipts for expenses under £X?
There is no general HMRC rule that says an expense is automatically allowable because it is below a particular amount. You should keep appropriate records and proof of your costs, including receipts, invoices and bank records.
Can I claim home office costs if I only work from home part-time?
Yes, a sole trader can potentially claim a reasonable proportion of household costs when working from home. If you use simplified expenses, you need to work at least 25 hours a month from home, with the monthly deduction depending on your hours.
What’s the difference between an allowable expense and a capital allowance?
An allowable expense is generally a running cost deducted when calculating taxable profit. Capital allowances provide tax relief for qualifying capital purchases such as equipment, machinery and certain vehicles.
Can sole traders claim pension contributions the same way as limited companies?
No, the tax treatment is different. A sole trader cannot normally put their personal pension contribution down as a business expense. Instead, they can usually get tax relief on personal pension payments under the pension tax rules. A limited company can pay into a director’s pension as an employer contribution, which may be treated as a company expense if the payment meets the relevant rules.
Conclusion
Claiming the right small business tax deductions can reduce your taxable profit and help you pay the right amount of tax. Costs such as home working, software, mileage and equipment may qualify if they meet HMRC rules. Keep clear records and separate personal costs from work expenses.
The 2026/27 tax year also brings changes such as the 55p mileage rate and MTD for Income Tax for those above the £50,000 threshold. If you are unsure about your expenses or need help with Self Assessment or Corporation Tax, MyIVA can help you manage your records, claim eligible costs and file your tax return correctly.
Speak to MyIVA today to get professional help with your tax and make sure you do not miss the deductions you may be entitled to.
