Simplified expenses vs actual costs
HMRC's flat-rate shortcuts vs tracking actual expenses — which saves more depends on your situation.
HMRC offers self-employed sole traders a flat-rate alternative to tracking actual expenses for three categories: vehicles, working from home, and living at business premises. The flat rates require no receipts, no calculations beyond multiplication, and no record-keeping beyond a mileage log or hours diary.
The trade-off is that flat rates often deliver less than the actual-cost calculation would. This guide walks through both methods with worked examples so you can pick the one that saves you more.
Method 1: Simplified mileage (vehicles)
Instead of tracking gas, insurance, MOT, repairs, and depreciation, you multiply business miles by a flat rate:
- Cars and goods vehicles: 45p/mile for first 10,000 miles, 25p/mile thereafter
- Motorcycles: 24p/mile
- Bicycles: 20p/mile
That's the deduction. No receipts needed beyond a mileage log book showing each business trip.
Worked example: simplified mileage
Sam delivers for an online food platform 6,000 miles per year:
6,000 × 45p = £2,700 deduction
Worked example: actual costs
Sam's actual vehicle costs for the year:
- Fuel: £2,400
- Insurance: £900
- MOT and servicing: £350
- Tax (VED): £180
- Repairs: £400
- Depreciation (writing down allowance, year 2): £1,000
Total vehicle expenses: £5,230
Total miles driven (business + personal): 12,000. Business proportion: 6,000 ÷ 12,000 = 50%.
£5,230 × 50% = £2,615 actual deduction
Simplified wins by £85 in this case. The simpler method is also faster — Sam doesn't need to track every fuel receipt for 12 months.
When actual mileage wins
- Expensive vehicle with high depreciation (especially year one of a new car)
- High insurance (young driver, performance vehicle)
- Heavy repair year
- Low business mileage but high overall vehicle cost
The lock-in
If you start with simplified mileage, you can switch to actual costs in any future year. But once you switch to actual, you're locked into actual for that vehicle's lifetime.
Conservative play if you're unsure: start with simplified. Keeps the door open.
Method 2: Simplified home office
Instead of calculating the business proportion of your home utilities, you claim a flat rate based on hours worked from home per month:
- 25-50 hours/month: £10/month (£120/year)
- 51-100 hours/month: £18/month (£216/year)
- 101+ hours/month: £26/month (£312/year)
Maximum £312/year for someone working 100+ hours from home.
Worked example: simplified home office
Maya is a freelance designer working 35 hours/week from home, so 140+ hours/month:
12 × £26 = £312/year deduction
Worked example: actual home office
Maya rents a 3-bedroom flat for £1,400/month. She uses one room (about 1/8 of the flat) exclusively as office:
- Rent: £16,800/year × 12.5% = £2,100
- Council Tax: £1,800/year × 12.5% = £225
- Utilities: £1,500/year × 12.5% = £188
- Internet: £360/year × 50% (work + personal) = £180
- Contents insurance: £180/year × 12.5% = £23
Total: £2,716 actual deduction
Maya's actual deduction is £2,400 more than simplified. At the basic-rate Income Tax (20%) plus 6% Class 4 NIC = 26%, that's about £625 in real money saved.
When simplified home office wins
- You rent cheaply or live in a low-cost-of-living area
- Your home office is a small portion of the property
- You don't want to deal with utility bill records
- You work fewer than 100 hours/month from home
When actual home office wins
- You live in a high-rent area (London, Manchester, Edinburgh)
- Your office is a meaningful portion of a large property
- Your utility bills are substantial (you run a recording studio, a soldering bench, a print shop at home)
- You're already tracking expenses for other reasons
The "wholly and exclusively" test
For the actual method, the room must be used wholly and exclusively for business during business hours. If you use the room for guests on weekends or as a study room for kids in the evening, it's mixed-use — and HMRC may scale back the proportion you can claim.
The pragmatic interpretation: a room that's clearly set up as an office (desk, monitor, business storage) and isn't used for substantial personal purposes during business hours generally passes. A guest bedroom with a desk in the corner doesn't.
Method 3: Living at business premises
Niche but worth mentioning. If you live at your business premises (pub, B&B, care home, B&B-style guesthouse), you use a flat rate to disallow the personal portion of premises costs. The flat rate is based on number of household occupants (people aged 18+):
- 1 occupant: £350/month
- 2 occupants: £500/month
- 3+ occupants: £650/month
You then claim the rest of the premises costs as business. Skip this method unless you actually live where you trade.
Combining methods
You can mix methods. Simplified mileage for the car, actual home office costs for the workspace. Or actual vehicle costs and simplified home office. The choice for each category is independent.
One exception: if you use simplified mileage, you can't separately claim depreciation, MOT, repairs, fuel, or insurance for that vehicle. The 45p/mile is supposed to cover all of it. You CAN still claim parking fees, tolls, and interest on car finance separately.
Documentation
Even on simplified methods you need:
- Mileage log — date, destination, miles, business purpose for each trip
- Hours-worked-from-home log — at least a monthly tally if you're using simplified home office
For actual methods you also need: every receipt and bill (utilities, fuel, insurance, repairs, etc.). A receipt scanner or app makes this manageable.
Decision matrix
| Situation | Recommended method |
|---|---|
| 5+ year old car under £15k value | Simplified mileage |
| New car worth over £30k | Actual costs (year 1 especially) |
| 10,000+ business miles per year | Often simplified — run both |
| Under 5,000 business miles in expensive car | Actual costs |
| Cheap rented flat outside London | Often simplified home office |
| London/Edinburgh/Manchester rent | Often actual home office |
| You hate paperwork | Simplified for both |
How this affects your tax bill
Lower allowable expenses = higher taxable profit = more tax. The reverse is also true — every additional pound of allowable expense saves 26p (basic rate band) or 42p (higher rate) in real money, depending on your bracket.
So the difference between simplified and actual on home office in our Maya example (£2,400 more deduction) saves £625-1,000 depending on her tax band. Worth the bookkeeping if she's already a higher-rate taxpayer.
Run your full position in the side-hustle tax calculator or National Insurance calculator to see actual savings.
One thing HMRC will not let you do
You can't use both simplified and actual within the same category in the same tax year. Pick one method per category, stick with it for the year, then re-evaluate at year-end.
You also can't use simplified expenses if you're a limited company. Simplified expenses are only available to sole traders and partnerships.
Frequently asked questions
What are HMRC simplified expenses?
HMRC simplified expenses are flat-rate alternatives to tracking actual costs for three categories: vehicles (45p/mile for the first 10,000 miles, 25p after), working from home (£10-£26/month based on hours worked), and living at your business premises (a fixed monthly deduction based on residents). They're optional — you can choose actual costs instead if they work out better.
Is the HMRC mileage rate better than claiming actual car costs?
For most self-employed people with a car used partly for business, the 45p mileage rate works out better at under about 10,000-12,000 business miles per year. Actual costs beat mileage if you drive a high-mileage, high-cost vehicle exclusively for business. The mileage rate cannot be used if you've previously claimed capital allowances on the same vehicle.
How do I calculate my home office deduction in the UK?
Simplified: count hours worked from home per month (25+ hours = £10, 51+ = £18, 101+ = £26). Actual costs: calculate what proportion of your home is used for business (rooms and hours) and apply that percentage to rent/mortgage interest, utilities, council tax, and broadband. Actual costs typically save more for full-time home workers in higher-cost homes.
Can I switch between simplified and actual expenses?
For home office costs, you can switch method each tax year. For vehicles, once you start using actual costs (and claim capital allowances), you cannot switch to the mileage rate for that vehicle — you're locked in. For a new vehicle, you can choose either method from the start. This means the vehicle choice is particularly important to get right in year one.
Which simplified expense saves the most for UK sellers?
For most e-commerce sellers working from home, the home office deduction is the most valuable. At 101+ hours/month (realistic for full-time home workers), you claim £26/month = £312/year with no record-keeping beyond hours. The mileage rate matters most if you regularly drive to collect stock, attend markets, or visit suppliers. Both are worth claiming — they're not mutually exclusive.