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Simplified Expenses vs Actual Costs: UK Sole Trader Decision Tree

By PocketReceipt Team · 10 May 2026 · 9 min read

What simplified expenses cover

HMRC offers three flat-rate simplifications for sole traders:

• Vehicles — mileage rates instead of working out actual fuel, insurance, MOT, depreciation
• Working from home — flat monthly rate based on hours worked, instead of apportioning utility bills
• Living at business premises — flat rate for personal use of premises (B&Bs, small guest houses, pubs with accommodation)

You can mix and match — for example, use simplified vehicles but actual home-working costs. The decision is per category, not all-or-nothing.

1. Vehicles

Simplified rates

Per HMRC's vehicle rates:

• Cars and goods vehicles: 45p per mile for first 10,000 business miles, 25p thereafter
• Motorcycles: 24p per mile (no upper threshold)

The mileage rate is meant to cover fuel, insurance, road tax, MOT, servicing, and depreciation. You cannot also claim those costs separately.

Actual costs

Add up everything: fuel, insurance, road tax, MOT, servicing, repairs, depreciation (capital allowances). Then apportion by business-use percentage (business miles ÷ total miles).

The break-even line for cars

Calculate your actual cost per mile. If it's below 45p, simplified expenses give you more deduction (good). If it's above 45p, actual costs give you more.

• Modern fuel-efficient car, low insurance, low business mileage: actual cost ~25–35p/mile → simplified wins
• Expensive car, high insurance, high mileage: actual cost ~50–70p/mile → actual wins
• Electric vehicle: actual cost (electricity + insurance + depreciation) often well below 45p/mile → simplified usually wins

The lock-in

Once you choose simplified expenses for a vehicle, you must stick with that method as long as you use the vehicle in your business. You can switch when you change vehicles.

2. Working from home

Simplified rates

Per HMRC's home-working rates, based on hours worked from home per month:

• 25–50 hours/month: £10/month flat (£120/year)
• 51–100 hours/month: £18/month flat (£216/year)
• 101+ hours/month: £26/month flat (£312/year)

This covers light, heat, water, internet — but NOT phone calls or rent/mortgage interest. Those are claimed separately in addition to the flat rate.

Actual costs

Apportion your household bills (gas, electricity, water, internet, council tax) by:

• Number of rooms used for business as a fraction of total habitable rooms
• Hours of business use per week

Mortgage interest and rent are also apportioned but with care — claiming part of your home as business use can affect Capital Gains Tax when you sell (Private Residence Relief).

The break-even

• Light home use (occasional admin, 25–50 hours/month): £120/year flat is usually higher than the apportioned actual cost. Simplified wins.
• Heavy home use (full-time freelancer working from a dedicated office room): apportioned actual costs often run £400–£800/year. Actual wins.
• The flat rate is genuinely simpler — no need to keep utility bills or floor-plan calculations.

The CGT angle

If you claim a specific room as exclusively for business, you may lose Private Residence Relief on that proportion when you sell your home. Most accountants advise either using the flat rate OR using actual costs but with "non-exclusive" business use to preserve full PRR.

3. Living at your business premises

Simplified rates

Per HMRC's living-at-business-premises rates (mainly for B&Bs, guest houses, pubs with accommodation, small care homes), based on people living there per month:

• 1 person: £350/month deduction from total premises costs
• 2 people: £500/month
• 3+ people: £650/month

You claim total business premises costs, then DEDUCT the flat rate for personal use. The flat rate represents what you'd reasonably consume at home as a person living there.

Actual costs

Apportion total costs by space used personally vs commercially, then by time. Often complicated. The flat rate exists precisely to avoid this calculation.

The break-even

The flat rate usually under-deducts personal use compared with actual apportioning, so you end up claiming MORE business cost. For most live-in B&B operators the flat rate wins on both simplicity and total deduction.

The combined decision matrix

Most sole traders end up with a mixed approach:

• Simplified vehicles if your vehicle is fuel-efficient or you drive under 10,000 business miles
• Actual vehicles if your vehicle is expensive, high-mileage, or specialist (van with custom kit)
• Simplified home working if you do under 100 hours/month from home — saves all the bill-keeping
• Actual home working if you're full-time from home with a dedicated office
• Simplified living-at-business-premises almost always — the calculation favour and the simplicity

What you can't simplify

HMRC's simplified expenses cover only those three categories. Everything else (stock, materials, phone, accountancy, advertising, tools, equipment, training, travel that isn't vehicle-based) is always claimed as actual cost. This is where keeping every receipt matters — there's no flat-rate alternative.

How to switch methods

You can switch between simplified and actual expenses each tax year on your Self Assessment return — except for vehicles, where the choice is locked per vehicle. There's no formal application; you just calculate using the new method on your next return.

Bottom line

Simplified expenses are often the right choice for low-volume cases — small home use, low-mileage cheap car. They save genuine admin time. But actual costs win when your real expenses materially exceed the flat rate. The break-even depends entirely on your specific numbers, so spending an hour each year comparing the two methods usually pays for itself.

Sources: All flat rates and rules per gov.uk/simpler-income-tax-simplified-expenses (and category sub-pages). Verify current rates before claiming — HMRC updates them in Spring Statements.