Every pound you claim correctly as an allowable business expense is a pound that stops your taxable profit — and therefore your tax bill — growing. Get it right and you keep more of what you earn. Get it wrong and you risk an HMRC enquiry, penalties, and interest on top of the tax.
The ‘wholly and exclusively’ rule is the single test HMRC applies to every expense — if any element is for personal use, the whole claim is denied. Common allowable expenses include premises costs, motor expenses (with apportionment), professional fees, software subscriptions, and reasonable staff entertainment. Personal expenses, client entertainment and most clothing remain non-deductible.
The 2026/27 tax year, which began on 6 April 2026, brings important changes: a new 40% First-Year Allowance is now live, the main rate of Writing Down Allowances has been cut from 18% to 14%, and Making Tax Digital for Income Tax has finally arrived for sole traders and landlords above the £50,000 threshold. Dividend tax rates have also risen, which changes the calculus for many owner-managed businesses.
This guide sets out what UK businesses can actually deduct in 2026/27, what they cannot, and where the rules differ from 2025/26.
The “Wholly and Exclusively” Rule
HMRC’s test for any allowable business expense is contained in the Income Tax (Trading and Other Income) Act 2005 and the Corporation Tax Act 2009. To be deductible, a cost must be incurred wholly and exclusively for the purposes of the trade. If there is any private benefit, the expense generally fails — unless the private element is incidental, or the cost can be reasonably apportioned between business and personal use.
🔍 Two Practical Examples
- Mobile phone: a single contract used 70% for business and 30% personal — claim 70% of the bill.
- Everyday clothing: not deductible, even if you only wear a suit to client meetings, because the clothing also serves a private purpose (warmth, decency).
The structure of your business matters too. Sole traders, partnerships, and limited companies share most rules, but limited companies can also access reliefs — such as Full Expensing — that are not available to the self-employed.
What You Can Claim: The Main Categories
1. Premises and Operating Costs
Rent, business rates, utilities (electricity, gas, water, broadband, phone), cleaning, security, and general office running costs are all deductible where they relate to business premises. If you operate from home, see the dedicated section below.
2. Staff Costs
Wages, salaries, employer National Insurance (15% on earnings above £96 per week for 2026/27, unchanged from April 2025), employer pension contributions, bonuses, staff training, and reasonable staff welfare costs are allowable. Employer pension contributions remain particularly tax-efficient — especially given the increase in dividend tax rates that took effect from April 2026.
3. Stock, Supplies and Raw Materials
Cost of goods sold, packaging, postage, and consumables used in the business.
4. Travel, Subsistence and Accommodation
Business travel — trains, flights, taxis, hotels, and meals while away from your normal place of work — is allowable. The catch: ordinary commuting between home and a regular workplace is not. If you use your own car, you can either claim actual running costs (apportioned for business use) or simplified mileage at HMRC’s approved rates:
- 45p per mile for the first 10,000 business miles in a tax year
- 25p per mile thereafter
5. Professional Fees and Insurance
Accountancy fees, legal fees relating to the trade, professional indemnity insurance, public liability insurance, and subscriptions to HMRC-approved professional bodies are all deductible.
6. Marketing and Advertising
Website costs, online advertising, print advertising, branded materials, and PR activity are all allowable, provided they promote the business itself rather than the individual owner’s personal brand.
7. Finance Costs
Interest on business loans, bank charges on a business account, and asset finance interest are deductible. Note: landlords with residential property face restricted relief — finance costs are limited to a 20% basic-rate tax credit, not a full deduction. See our Section 24 impact calculator to see how this affects you.
8. Bad Debts
Specific debts that have genuinely gone bad can be written off against profits. General provisions for doubtful debts are not allowable for tax.
Capital Allowances: What Changed in 2026/27
Items that last longer than one accounting period — laptops, machinery, vans, fit-out works — are “capital” rather than revenue. You claim relief through the capital allowances regime, and this is where the biggest 2026/27 changes have landed.
| Relief | 2025/26 | 2026/27 |
|---|---|---|
| Annual Investment Allowance (AIA) | £1m, 100% relief | £1m, 100% relief (unchanged) |
| Full Expensing (companies only) | 100% main pool / 50% special rate | 100% main pool / 50% special rate (unchanged) |
| 40% First-Year AllowanceNEW | Not available | NEW — live from 1 Jan 2026 (companies) / 6 Apr 2026 (unincorporated) |
| Main pool WDA | 18% (reducing balance) | 14% — reduced from 1/6 April 2026 |
| Special rate pool WDA | 6% | 6% (unchanged) |
📋 Practical Pecking Order for 2026/27
- Use the Annual Investment Allowance first — unrestricted on second-hand assets, 100% relief up to £1m.
- Limited companies should use Full Expensing for new main-pool spend above the £1m AIA — no monetary cap.
- The new 40% FYA is most useful for unincorporated businesses with capital spend above £1m, and for assets bought to lease out.
- Cars are excluded from AIA, Full Expensing, and the 40% FYA. Fully electric cars get a 100% First-Year Allowance; petrol and diesel cars go into the main pool (14% WDA) or special rate pool (6% WDA).
In practice, most smaller businesses still get 100% relief in year one through AIA on up to £1 million of qualifying spend. The cut in WDA main rate from 18% to 14% means any expenditure above the AIA — not covered by Full Expensing or the 40% FYA — now gets relief more slowly than before.
Are You Claiming Everything You’re Entitled To?
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Working from Home: Two Methods
If you genuinely use part of your home for business, you have two ways to claim. HMRC has not changed the flat rates for 2026/27.
⚠️ CGT Warning
If you designate a room as exclusively business use, you may trigger a partial loss of Private Residence Relief when you sell the property, exposing part of the gain to Capital Gains Tax. Most advisers recommend keeping at least some incidental personal use in any room used for work.
Flat-Rate (Simplified) Method
For self-employed individuals working from home at least 25 hours per month:
- £10/month for 25–50 hours
- £18/month for 51–100 hours
- £26/month for 101+ hours
Company directors who work from home can be reimbursed by their company at £6 per week (£312 per year) tax-free, without keeping receipts.
Actual Cost Method
Calculate the business proportion of household running costs — gas, electricity, council tax, mortgage interest (or rent), broadband, water — based on the number of rooms used and the time spent working. This often produces a larger claim, but requires more record-keeping.
Common Traps and Disallowable Costs
❌ Costs HMRC Will Not Accept
- Client entertainment: never deductible for tax, however legitimate the business reason. Staff entertainment is allowable, and there is a £150 per head annual function exemption for employees.
- Fines and penalties: parking fines, speeding fines, and HMRC penalties are all disallowable.
- Training that creates a new skill: allowable only if it updates existing knowledge needed for the current trade. Training that qualifies you for a new profession is treated as capital and not deductible.
- Drawings and dividends: money taken out by the owner is not a business expense. Note that dividend tax rates rose from April 2026 — basic rate from 8.75% to 10.75%, higher rate from 33.75% to 35.75%.
- Personal pension contributions for sole traders: not deductible from trading profits — relief is given through the personal tax computation.
Records, MTD and What to Do Now
HMRC requires you to keep records to support every expense claimed. The retention periods are:
- Self-employed individuals: 5 years after the 31 January self-assessment submission deadline
- Limited companies: 6 years from the end of the relevant accounting period
📍 Making Tax Digital for Income Tax — Live from 6 April 2026
- Sole traders and landlords with qualifying gross income above £50,000 must now keep digital records and submit quarterly updates through MTD-compatible software
- Threshold drops to £30,000 from April 2027, and £20,000 from April 2028
- Paper expense receipts are no longer accepted for in-scope businesses
- If you expect to cross the threshold, move onto MTD-compatible software before — not after — you become mandated
✅ Key Takeaways — 2026/27
- Apply the “wholly and exclusively” test to every cost — where there is dual use, apportion fairly
- Use AIA or Full Expensing aggressively for capital purchases — both still deliver 100% relief in year one for most plant and machinery
- Plan around the new 14% main pool WDA — large purchases above the AIA now attract noticeably slower relief than in 2025/26
- Pick the right home-office method — flat rate for simplicity, actual costs for higher claims (with CGT awareness)
- Never put client entertainment, fines, or commuting through as expenses — these are disallowed and a red flag in an HMRC enquiry
- Revisit your salary-versus-dividends mix following the April 2026 dividend tax increases — use our calculator
- If you are in scope for MTD for Income Tax, get onto compliant software now
Frequently Asked Questions
What is the wholly and exclusively rule?
HMRC requires that to be deductible, a cost must be incurred wholly and exclusively for the purposes of the trade. If there is any private benefit, the expense generally fails unless it can be reasonably apportioned.
What is the Annual Investment Allowance for 2026/27?
The Annual Investment Allowance (AIA) remains at £1 million for 2026/27, giving 100% first-year relief on qualifying plant and machinery expenditure.
What changed with capital allowances in 2026/27?
The main pool Writing Down Allowance was cut from 18% to 14% from 1/6 April 2026. A new 40% First-Year Allowance was introduced. Full Expensing for companies remains unchanged.
📚 Related reading
- Sole Trader Setup Guide 2026/27 — New sole traders often miss legitimate expense claims — the basics of registration and Self Assessment first.
- Top 10 UK Business Tax Mistakes — Wrong expense classification is one of the most common HMRC findings — see the rest.
Shamim is a Chartered Tax Adviser and Fellow of the ACCA with over 13+ years of experience in UK and international tax. He founded The Tax Lead to provide commercially focused, technically rigorous advice to owner-managed businesses, property investors and international clients. He holds the CTA — the UK's highest tax qualification — with an active Head of Tax — Europe role at a major digital infrastructure operator.