What Is the Difference Between Allowable and Disallowable Expenses

At Towerstone Accountants we provide specialist personal tax services, for self employed, and individuals across the UK. This article has been written to explain What is the difference between allowable and disallowable expenses, in clear practical terms, so you understand how personal tax and Self Assessment rules apply in real situations. Our aim is to help you stay compliant, avoid costly mistakes, and make confident tax decisions.

This is one of the most important concepts in UK tax and also one of the most misunderstood. I see more mistakes made around expenses than almost any other area of Self Assessment. People often assume that if something feels business related or if it was paid from a business account it must be deductible. Unfortunately HMRC does not work on feelings or intention. It works on rules.

Understanding the difference between allowable and disallowable expenses is essential if you are self employed a landlord or a company director. It directly affects how much tax you pay and how much risk you carry if HMRC ever reviews your return.

In this article I want to explain clearly what allowable and disallowable expenses actually mean how HMRC decides the difference and where people most commonly get caught out. This is based on real cases I deal with every year not textbook examples. My aim is to help you claim what you are entitled to without drifting into grey areas that cause problems later.

What HMRC Means by Allowable Expenses

An allowable expense is a cost that HMRC accepts as being incurred wholly and exclusively for the purpose of your trade or business. That phrase is critical and it appears throughout UK tax law.

Wholly and exclusively does not mean mostly business related or partly business related. It means the expense must be incurred solely for business purposes with no personal element.

If an expense meets this test it can usually be deducted from your income when calculating taxable profit. This reduces the profit figure and therefore reduces the tax you pay.

Allowable expenses are not optional. If they meet the rules you are entitled to claim them. The difficulty is applying the rules correctly in real life where spending is rarely black and white.

Disallowable Expenses Explained

Disallowable expenses are costs that HMRC does not allow you to deduct for tax purposes. This does not mean the expense was unnecessary or unreasonable. It simply means it does not meet the tax rules.

An expense may be disallowable because:

• It is personal in nature

• It has a mixed business and personal purpose

• It is capital rather than revenue

• It is specifically prohibited by tax legislation

• It is not incurred wholly and exclusively for business

Disallowable expenses must not be deducted when calculating taxable profit. If they are included HMRC can disallow them later and charge additional tax interest and potentially penalties.

The Wholly and Exclusively Test in Practice

This test is where most confusion arises. In theory it sounds simple. In practice it requires judgement.

An expense passes the test if it would not have been incurred at all had the business not existed. If there is a dual purpose the expense usually fails even if the business element is significant.

For example if you incur a cost partly for business and partly for personal benefit HMRC will usually treat it as disallowable unless the business portion can be clearly separated.

This is why intent matters less than outcome. HMRC looks at what the expense actually achieved not what you hoped it would achieve.

Common Examples of Allowable Expenses

Allowable expenses vary by business type but common examples include:

• Office costs such as stationery and software

• Business insurance

• Advertising and marketing

• Professional fees such as accountancy and legal costs

• Staff wages and subcontractor costs

• Business travel that is entirely work related

• Repairs and maintenance of business equipment

• Use of home for business where calculated correctly

These expenses are generally accepted provided they are reasonable supported by records and genuinely business related.

Common Examples of Disallowable Expenses

Disallowable expenses often catch people out because they feel connected to work even when they are not allowable for tax.

Common examples include:

• Ordinary clothing even if worn for work

• Personal food and groceries

• Private medical costs

• Fines and penalties

• Client entertainment

• Personal portion of mixed use expenses

• Travel between home and a regular workplace

• Family expenses disguised as business costs

These costs may be incurred while running a business but that does not make them deductible.

Mixed Use Expenses and Apportionment

Some expenses have both business and personal elements. These are known as mixed use expenses.

In some cases HMRC allows apportionment. In others it does not.

For example household utilities used partly for work can often be apportioned based on reasonable usage. However clothing worn for work cannot be split. HMRC views clothing as inherently personal even if you would not wear it outside work.

This distinction is subtle but important. Apportionment is only allowed where the business use can be clearly separated and quantified.

Capital vs Revenue Expenses

Another common area of confusion is the difference between capital and revenue expenses.

Revenue expenses are day to day running costs and are usually allowable against profit in the year incurred.

Capital expenses are costs of buying assets or making long term improvements. These are not deducted in the same way. Instead they may qualify for capital allowances or be dealt with on disposal.

Examples of capital items include:

• Equipment

• Machinery

• Vehicles

• Significant improvements to property

Claiming capital items as revenue expenses is a common error and one HMRC looks for.

Expenses That Are Always Disallowable

Some expenses are specifically disallowed regardless of context.

These include:

• Penalties and fines

• Late payment interest charged by HMRC

• Political donations

• Client entertainment costs

• Personal living costs

Even if these expenses arise because of the business they cannot be deducted.

Why This Matters More Than People Realise

Claiming disallowable expenses does not just affect the current year’s tax bill. It increases risk.

HMRC often reviews expense patterns rather than individual receipts. If expense ratios look unusually high this can trigger questions.

Once HMRC starts asking questions they may review multiple years. What began as a small mistake can snowball into a much larger issue.

This is why accuracy matters even when the amounts feel small.

Record Keeping and Evidence

HMRC expects you to keep records to support expenses claimed. This includes invoices receipts and explanations where necessary.

If HMRC challenges an expense the burden of proof is on you. Saying it was business related is not enough.

Clear records and consistent treatment year to year reduce risk significantly.

The Grey Areas Where Advice Matters

Some expenses sit in genuine grey areas where judgement is required. These include:

• Home office claims

• Mobile phone contracts

• Vehicles

• Training and courses

• Professional subscriptions

• Travel linked to multiple purposes

In these areas context matters. What is allowable for one person may not be for another depending on how the expense relates to the business.

This is where professional advice often pays for itself by preventing incorrect claims.

The Difference Between Reasonable and Allowable

One of the most important distinctions I try to explain to clients is that reasonable does not mean allowable.

An expense can be sensible necessary and entirely justified from a business perspective and still be disallowable for tax.

Tax law is not designed to reflect fairness. It is designed to apply rules consistently.

Understanding this prevents frustration and helps you plan properly.

How an Accountant Approaches Expenses

When I review expenses I am not looking for ways to disallow everything. I am looking for accuracy defensibility and consistency.

My focus is on:

• Claiming everything that is genuinely allowable

• Excluding what is not

• Apportioning correctly where permitted

• Reducing risk of future challenge

This balanced approach protects clients in the long term.

Key takeaways

The difference between allowable and disallowable expenses comes down to one core principle. HMRC only allows costs that are incurred wholly and exclusively for business purposes and that meet specific legal rules.

Trying to push personal costs through the business rarely ends well. Equally failing to claim legitimate expenses means paying more tax than necessary.

From my experience the safest and most effective approach is not aggressive claiming or overly cautious underclaiming. It is understanding the rules and applying them consistently.

Clarity in this area saves money reduces stress and keeps you on the right side of HMRC.

You may also find our guidance on What expenses can I claim if I am self employed, and Can I claim for clothes, tools, or training as a business expense, helpful when reviewing related personal tax questions. For a broader overview of Self Assessment deadlines, reporting, and obligations, you can visit our self assessment guidance hub.