How to track business expenses

Published Friday 15 May 2026

Table of contents

• What are business expenses?
• The importance of tracking business expenses
• Types of business expenses you can claim
• What you cannot claim as a business expense
• Tax-deductible expenses and how they lower your tax bill
• Capital allowances vs business expenses
• How to track business expenses in 6 steps
• Best practices for tracking expenses
• Simplify your expense tracking with Xero
• FAQs on tracking business expenses

Key takeaways

• Track every business expense to reduce your tax bill. HMRC lets you deduct allowable expenses from your revenue before calculating tax, so accurate records directly lower what you owe.
• Know what you can and can't claim. Common allowable expenses include office costs, travel, staff wages, and working-from-home costs, but personal spending, client entertainment, and fines aren't deductible.
• Keep records for at least five years. HMRC requires you to store receipts and records for five years after the 31 January submission deadline for the relevant tax year.
• Use digital tools to stay compliant. From April 2026, sole traders and landlords earning over £50,000 must keep digital records under Making Tax Digital (MTD) for Income Tax.

What are business expenses?

Business expenses are the costs you incur while running your business. HMRC calls these "allowable expenses" when they qualify as tax deductions on your Self Assessment tax return.

Allowable expenses must be wholly and exclusively for business purposes. If a cost has both personal and business use, you can only claim the business portion. You'll find the full list of qualifying categories on the HMRC allowable expenses page.

Understanding what counts as a business expense is the first step to reducing your tax bill. The more accurately you track these costs, the less tax you'll pay at the end of the year.

The importance of tracking business expenses

Tracking your business expenses helps you claim every deduction you're entitled to and avoid paying more tax than necessary. Without organised records, you risk missing legitimate claims or facing penalties from HMRC.

Good expense tracking also gives you a clearer picture of your cash flow. When you know exactly where your money goes each month, you can spot overspending, plan ahead, and make confident financial decisions.

From April 2026, Making Tax Digital (MTD) for Income Tax requires sole traders and landlords with income over £50,000 to keep digital records and submit quarterly updates. Starting your expense tracking habit now makes that transition smoother.

Types of business expenses you can claim

HMRC allows you to deduct a wide range of day-to-day running costs from your taxable income. Here are the main categories of allowable expenses for the 2025/26 tax year. For a deeper look at each category, see the Xero guide to self-employed allowable expenses.

Office costs

You can claim the cost of supplies and services you use to run your office or workspace. Common office expenses include:

• Stationery and printing. Paper, ink cartridges, pens, and postage all qualify.
• Phone and broadband. Claim the business portion of your phone bill and internet connection.
• Software subscriptions. Accounting software, project management tools, and cloud storage are deductible.
• Office furniture and equipment. Desks, chairs, and small items under £1,000 can often be claimed as expenses rather than capital allowances.

Travel and mileage

Travel costs for business purposes are allowable, but commuting between your home and regular workplace isn't. You can claim for:

• Vehicle running costs. Fuel, insurance, repairs, and parking for business journeys.
• Simplified mileage rates. HMRC lets you claim 45p per mile for the first 10,000 business miles and 25p per mile after that, instead of tracking actual vehicle costs.
• Public transport. Train, bus, and taxi fares for business trips are fully deductible.
• Accommodation and meals. Overnight stays and meals during business travel qualify.

Staff costs

If you employ people, their costs are generally allowable. You can claim for:

• Salaries and wages. The full cost of employee pay, including bonuses.
• Employer National Insurance contributions. Your share of NI is a deductible business cost.
• Pension contributions. Employer contributions to workplace pensions qualify.
• Subcontractor costs. Fees paid to freelancers and contractors for business work.

You can learn more about handling staff expenses in the Xero guide to employee expense management.

Working from home

If you work from home, you can claim a proportion of your household costs. HMRC offers simplified flat rates based on the hours you work from home each month:

• 25 to 50 hours per month: £10
• 51 to 100 hours per month: £18
• 101 or more hours per month: £26

Alternatively, you can calculate the actual proportion of household costs used for business. This includes a share of your heating, electricity, council tax, mortgage interest, or rent.

Professional services

Fees you pay to professionals for business advice are allowable. These include:

• Accountancy fees. The cost of hiring an accountant to prepare your tax return.
• Legal fees. Solicitor costs related to your business, such as contract reviews.
• Professional memberships. Subscriptions to industry bodies relevant to your trade.

Insurance

Business insurance premiums protect you from risk and qualify as allowable expenses. Common types include:

• Public liability insurance. Covers claims from customers or the public.
• Professional indemnity insurance. Protects against claims of negligence or poor advice.
• Contents and buildings insurance. The business proportion of cover for your premises.

Marketing and advertising

Costs you spend promoting your business are fully deductible. You can claim for:

• Website hosting and design. Building and maintaining your business website.
• Online advertising. Paid search, social media ads, and directory listings.
• Printed materials. Business cards, flyers, and brochures.

Training costs

Training that updates or maintains skills you already use in your business is allowable. You can't claim for training in entirely new skills unrelated to your current trade. Deductible training costs include courses, workshops, and professional development events directly connected to your work.

Stock and raw materials

If your business sells physical products, the cost of stock and raw materials is deductible. This includes items you buy for resale, components used in manufacturing, and packaging materials.

Financial costs

Certain financial charges related to running your business are allowable. These include:

• Bank charges. Fees on your business bank account.
• Interest on business loans. The interest portion of repayments on loans used for business purposes.
• Hire purchase interest. Interest on finance agreements for business equipment.

What you cannot claim as a business expense

Not every cost you encounter while running your business is tax-deductible. HMRC is clear about what falls outside the definition of allowable expenses.

The following costs can't be claimed:

• Personal expenses. Groceries, personal clothing, and non-business purchases don't qualify, even if you buy them during working hours.
• Client entertainment. Taking clients out for meals, drinks, or events isn't deductible, even if you discuss business.
• Fines and penalties. Parking fines, speeding tickets, and late-payment penalties from HMRC can't be claimed.
• Non-business clothing. Everyday clothes aren't allowable, even if you only wear them for work. Uniforms, protective clothing, and costumes for performers are the exceptions.
• Personal portion of mixed-use items. If you use your phone or car for both personal and business reasons, only the business share is deductible.

Tax-deductible expenses and how they lower your tax bill

Tax-deductible expenses reduce your taxable profit, which directly lowers the amount of Income Tax and National Insurance you owe. The more allowable expenses you claim, the smaller your tax deduction and the smaller your tax bill.

Here's how it works. You subtract your total allowable expenses from your business revenue to arrive at your taxable profit. You then pay tax only on that reduced figure. For example, if your revenue is £60,000 and your allowable expenses total £15,000, you're taxed on £45,000 rather than the full amount.

This is why keeping thorough records of every expense category matters. Missing even small claims adds up over a full tax year. Use the types of expenses covered above as a checklist when reviewing your costs each quarter.

Capital allowances vs business expenses

Capital allowances and business expenses are both tax deductions, but they apply to different types of spending. Understanding the distinction helps you claim the right relief.

Business expenses, also called revenue expenses, cover your day-to-day running costs. These include rent, utilities, stock, and staff wages. You deduct them in full from your taxable profit in the year you incur them.

Capital allowances apply to assets you buy for long-term use in your business. Equipment, vehicles, machinery, and certain fixtures qualify. Instead of deducting the full cost in one year, you claim capital allowances to spread the tax relief over time, or use the Annual Investment Allowance (AIA) to deduct up to £1 million in the year of purchase.

You'll find more detail on how capital allowances work on the HMRC capital allowances page.

How to track business expenses in 6 steps

Setting up a reliable system for tracking expenses saves you time at tax season and keeps you compliant with HMRC. Follow these six steps to build a process that works.

1. Open a separate business bank account. Keeping your business and personal finances apart makes it much easier to identify deductible expenses. Every transaction in your business account is a potential claim.
2. Choose an expense tracking method. Pick accounting software that lets you record, categorise, and store expenses digitally. With MTD for Income Tax starting in April 2026 for incomes over £50,000, digital record-keeping is becoming a legal requirement. Explore Xero's accounting features to see what's available.
3. Capture receipts immediately. Photograph or scan every receipt as soon as you get it. Paper receipts fade quickly, and HMRC accepts scanned copies as valid proof of purchase. You can reclaim VAT on small purchases of £25 or less even without a receipt, as long as the supplier is VAT-registered.
4. Categorise each expense. Assign every expense to the correct category, such as travel, office costs, or professional services. Consistent categorisation makes your tax return faster to complete and easier to review.
5. Reconcile your records regularly. Match your recorded expenses against your bank statements at least once a month. This catches errors, duplicate entries, and missed transactions before they become bigger problems.
6. Review and file quarterly. Set a routine to review your expenses every quarter. This keeps your records up to date and prepares you for the quarterly submissions required under MTD.

Best practices for tracking expenses

Once your tracking system is in place, these habits help you get the most from it and avoid common mistakes.

• Store records for at least five years. HMRC requires you to keep expense records for five years after the 31 January submission deadline for the relevant tax year. Digital storage makes this easier and safer than paper filing. You can read more about HMRC's record-keeping requirements.
• Set spending policies. If you have employees who claim expenses, create clear guidelines on what's claimable and set approval limits. This reduces disputes and keeps claims consistent.
• Automate where you can. Bank feeds, receipt scanning, and automatic categorisation cut down on manual data entry. Automation also reduces the risk of human error in your records.
• Separate VAT from the expense amount. If you're VAT-registered, always record the net amount and VAT separately. This makes your VAT returns accurate and prevents you from under-claiming or over-claiming.
• Back up your data. Keep cloud-based backups of all your expense records. If your computer fails or you lose paper receipts, you'll still have everything HMRC needs.

Simplify your expense tracking with Xero

Tracking business expenses doesn't have to be a time-consuming chore. Xero's accounting software lets you capture receipts on your phone, automate bank reconciliation, and categorise expenses in real time, so your records are always ready for HMRC.

Whether you're preparing for MTD or simply want clearer visibility over your business spending, Xero brings everything into one place. Try it today and get one month free.

FAQs on tracking business expenses

Here are some frequently asked questions about tracking and claiming business expenses in the UK.

What is the difference between a business expense and a capital allowance?

A business expense covers day-to-day running costs like rent, utilities, and office supplies. A capital allowance applies to assets bought for long-term business use, such as equipment, vehicles, or machinery. You deduct expenses in the year you incur them, while capital allowances may be spread over several years.

Can I claim for working from home?

Yes. If you work from home regularly, you can use HMRC's simplified flat rates: £10 per month for 25 to 50 hours, £18 for 51 to 100 hours, or £26 for 101 or more hours. Alternatively, you can calculate the actual business proportion of your household bills.

How long should I keep business expense records?

You must keep your records for at least five years after the 31 January submission deadline for the relevant tax year. For example, records for the 2025/26 tax year (submitted by 31 January 2027) should be kept until at least 31 January 2032.

Can I track business expenses on my phone?

Yes. Most accounting apps, including Xero, let you photograph receipts, categorise expenses, and reconcile bank transactions directly from your phone. This makes it easy to record costs as they happen, rather than saving up paper receipts.

Will HMRC accept scanned receipts?

Yes. HMRC accepts digital copies of receipts as valid records, provided they're clear and legible. Scanning or photographing receipts as soon as you receive them is a good habit, since paper copies can fade or get lost over time.