Simplified Expenses vs Actual Costs: Which Is Better?
For working from home and vehicle costs, UK sole traders can claim either their actual costs or flat rates known as simplified expenses. Flat rates save time and paperwork, but they do not always give the biggest deduction. This guide compares the two, shows the current rates and explains the rules that lock you in. It is general information, not tax advice, so check GOV.UK or an accountant before you decide.
Key takeaways
- Simplified expenses are optional flat rates for working from home and for business vehicles.
- The home flat rate applies only if you work 25 hours or more a month from home, and it does not cover phone or internet.
- Mileage rates are 45p a mile for the first 10,000 business miles in cars and goods vehicles, 25p after that, and 24p for motorcycles.
- You cannot claim mileage and actual car costs for the same vehicle, and once you use the flat rate for a vehicle you must keep using it.
- Flat rates usually win on simplicity; actual costs can win on value, especially for heavy home use or expensive vehicles.
Working out the exact business share of your heating, electricity or car running costs takes time and good records. Simplified expenses were designed to cut that work down. Instead of calculating real costs, you multiply hours or miles by a set rate.
The trade-off is accuracy. A flat rate is the same for everyone, while your real costs depend on your home, your car and how you work. The right choice is the one that gives a fair deduction for a level of record keeping you can actually sustain.
What simplified expenses cover
Simplified expenses apply to specific areas, not to all your business costs. For most freelancers and sole traders, the two that matter are:
- Working from home: a monthly flat rate based on the hours you work at home.
- Vehicles: a pence-per-mile rate for business journeys.
Everything else, such as software, equipment, travel fares and marketing, is still claimed at actual cost. Simplified expenses are a choice for these specific areas, and many sole traders mix them: flat rate for one, actual costs for another.
Working from home: the flat rates
The home flat rate is based on the number of hours you work from home each month. You can only use it if you work 25 hours or more a month at home.
| Hours of business use at home per month | Flat rate per month |
|---|---|
| 25 to 50 | £10 |
| 51 to 100 | £18 |
| 101 or more | £26 |
The flat rate covers household running costs such as heating and electricity. It does not include phone or internet, so you claim the business share of those separately, whichever method you choose for the home.
The actual costs alternative
Instead of the flat rate, you can work out the business share of your actual household costs. This usually means taking your yearly bills, working out a fair proportion based on the rooms you use and how long you use them for business, and claiming that share. It takes more effort and needs clear records, but it reflects your real situation.
Example
Imagine a freelance translator who works from home about 120 hours every month. Using the flat rate, she claims £26 a month, or £312 for the year, with almost no calculation. Using actual costs, she adds up her made-up household bills and works out a business share based on one room used for work during working hours. If that share comes to more than £312, actual costs give the bigger deduction; if it is less, or close, the flat rate saves her time. These figures are illustrative only.
Common mistake
Leaving phone and internet out entirely because you used the home flat rate. The flat rate does not cover them. Claim the business share of your phone and broadband separately, based on how much you use them for work.
Vehicles: mileage rates vs actual costs
For business journeys, the simplified approach is a mileage rate. You keep a log of business miles and multiply by the rate.
The alternative is claiming the business share of actual vehicle costs: fuel, insurance, repairs, servicing and so on. Under cash basis, cars use capital allowances for the purchase cost, rather than being claimed as a simple expense.
Example
Imagine a sole trader who drives 12,000 business miles in a car during the year. Using mileage rates, the claim is 10,000 miles at 45p (£4,500) plus 2,000 miles at 25p (£500), a total of £5,000. Using actual costs, he would add up all his car running costs, work out the business share from his mileage log and add capital allowances. If his car is economical, mileage rates may well give more; if it is expensive to run, actual costs may. These are made-up figures for illustration.
The lock-in rule
Two vehicle rules are important:
- No double claims. You cannot claim mileage rates and actual car costs for the same vehicle.
- Once chosen, it stays. If you use the flat rate for a vehicle, you must keep using it for that vehicle for as long as you use it in the business.
This makes the first decision for a vehicle a long-term one. Think about how many miles you expect to drive and what the vehicle costs to run before you pick.
Side by side: which suits you?
Simplified expenses: strengths
- Much less record keeping and calculation
- Easy to explain and repeat every year
- Fair for typical home working and economical cars
- Fewer judgment calls about business percentages
Simplified expenses: limits
- May give a smaller deduction if your real costs are high
- Home flat rate needs at least 25 hours a month at home
- Home flat rate excludes phone and internet
- Vehicle choice locks you in for that vehicle
As a rough rule of thumb, flat rates tend to suit people with modest home use and economical vehicles, while actual costs tend to suit people with a large dedicated workspace, high home running costs or expensive vehicles. The only way to know for sure is to run both calculations with your own figures.
Pro tip
Keep a mileage log whichever vehicle method you choose. With the flat rate it is the whole basis of your claim. With actual costs, it is how you prove the business share. A simple app or spreadsheet with date, destination, purpose and miles is enough.
How to decide in five steps
- Track your hours and miles for a typical month or two.
- Calculate the flat rate claim using the GOV.UK rates.
- Estimate actual costs from your bills and the business share you can justify.
- Compare the results and think about how much record keeping you can maintain.
- Choose and note the method in your records, remembering that a vehicle flat rate cannot be switched later.
Records you still need with flat rates
Simplified expenses reduce paperwork, but they do not remove it. Your claim is only as good as the evidence behind the hours and miles you report. Keep these records whichever method you use:
- Home working hours. A simple monthly note of the hours you worked from home, enough to show which flat rate band applies.
- Mileage log. Date, start and end point, business purpose and miles for every business journey.
- Phone and internet bills. Needed to claim the business share separately from the home flat rate.
- Vehicle details. Which vehicle you use for business and which method you chose for it, so you apply the lock-in rule correctly in later years.
- A note of your method. One line in your records saying which approach you used for home and vehicle costs in each tax year.
If you use actual costs, you also need the underlying bills and a written explanation of how you worked out the business share. Good records make either method easy to defend if HMRC ever asks.
Your simplified expenses checklist
- Record the hours you work from home each month
- Check you meet the 25-hour monthly minimum before using the home flat rate
- Claim the business share of phone and internet separately
- Start a mileage log for every business journey
- Compare flat rates with actual costs before choosing a method for a new vehicle
- Recheck rates on GOV.UK at the start of each tax year
Frequently asked questions
Can I use the home flat rate and claim actual vehicle costs?
Yes. The choices are separate. You can use the flat rate for working from home and actual costs for your vehicle, or the other way round, as long as you follow the rules for each.
Do limited companies use simplified expenses?
Simplified expenses are for sole traders and business partnerships, not limited companies. Companies have their own rules for expenses and mileage, so speak to an accountant if you run a company.
Can I switch from the mileage rate to actual costs for the same car?
No. Once you use the flat rate for a vehicle, you must keep using it for that vehicle. You can choose a different method for a different vehicle.
What if I work from home fewer than 25 hours a month?
You cannot use the home flat rate for that month. You may still be able to claim a business share of actual costs if you can justify it, and you can still claim the business share of phone and internet.
Related reading
The bottom line
Simplified expenses trade a little accuracy for a lot of convenience. For modest home working and economical cars they are often a sensible choice. If your workspace or vehicle costs are high, actual costs may give a bigger deduction, as long as you keep the records to support them. Run both numbers, and be careful with vehicles, because the flat rate choice sticks.
Flat rates and rules can change from one tax year to the next. This is general information, not tax advice, so check the current figures on GOV.UK or ask an accountant before you decide.
