If you're a freelancer or run a small business in Pakistan, and your income is taxed under the normal regime, you pay tax on your profit: your business income minus allowable expenses. An expense is deductible if it is incurred wholly and exclusively to earn that business income and you can prove it with records. Personal spending is never deductible. This guide lists the expenses freelancers and SMEs commonly claim for tax year 2026 (1 July 2025 to 30 June 2026), how to document each one, and when expenses can't be deducted at all.
The basic rule
Under the Income Tax Ordinance, 2001:
Taxable business income = gross business income − allowable business expenses
An expense is allowable when:
- it was incurred wholly and exclusively for your business
- it is not a personal or household expense
- you can prove it, with an invoice, receipt or bank record showing what was bought, from whom, when, and that you paid for it
Costs of long-lived assets such as computers aren't deducted all at once. You claim depreciation instead (see below).
When expenses can't be deducted
Expenses reduce tax only on income taxed on your profit. Some income is taxed at a fixed rate on the gross amount, as a final or presumptive tax, and expenses aren't deducted against it.
The most common case for freelancers is IT and IT-enabled services export income. Where the conditions for the final tax treatment are met, the tax collected on your export proceeds is the final tax on that income, and you don't claim expenses against it. Our freelancer and IT export guide explains how that regime works.
If you have both kinds of income, for example export income and work for local clients, your expenses are relevant only to the income taxed under the normal regime. Keep records that show which costs relate to which work.
Common deductible expenses for freelancers and SMEs
| Expense | Examples | Keep as proof |
|---|---|---|
| Software and digital tools | Cloud storage, project management tools, design software, accounting software, website hosting, domain registration, VPN, online courses relevant to your work | Invoices, subscription receipts, card or bank statements |
| Office costs | Co-working space rent, office rent, office supplies, cleaning, minor repairs | Rent agreement, receipts |
| Home office | The business share of rent and of electricity, internet and phone bills | Rent agreement, utility bills, a note of how you worked out the business share |
| Professional fees | Accountant, tax consultant, lawyer, marketing agency, virtual assistant, subcontracted freelancers | Invoices from the provider, proof of payment, withholding tax records if you had to deduct tax |
| Marketing and advertising | Facebook and Google ads, website development and maintenance, business cards, marketplace listing fees | Platform invoices, campaign reports |
| Travel and conveyance | Fuel, taxis, public transport and accommodation for business trips | Receipts and bills; a vehicle logbook if you claim fuel |
| Training | Courses, workshops, seminars and certifications that build your business skills | Receipts or invoices from the provider |
| Bank and payment charges | Business account fees, transaction charges, payment gateway fees (e.g. Payoneer, PayPal, local processors), card processing fees | Bank statements, payment processor reports |
| Staff | Salaries and wages paid to employees | Payroll records, proof of payment |
| Stock (for sellers) | Cost of goods you resell | Supplier invoices |
Home office: claim a fair share
If you work from home, you can claim a proportion of rent and utility bills. Base it on the space used for the business and, where relevant, how much you use it for work. Write down how you calculated the share, and use the same method every year. Claiming your whole electricity bill for a room you also live in is the kind of claim that doesn't survive an audit.
Depreciation on equipment
Laptops, cameras, office furniture and vehicles last more than a year, so you can't deduct their full cost in the year you buy them. You claim depreciation over their useful life, at the rates FBR prescribes for each category of asset. Keep:
- the original purchase invoice
- an asset register showing each asset, its date of purchase and its cost
- a record of any asset you sell or stop using
Paying others: check withholding tax
When you pay certain service providers, landlords or suppliers, you may be required to deduct withholding tax and deposit it with FBR. Failing to deduct and deposit it when required can lead to penalties. Check the current FBR withholding tax card before making large payments.
What you can't claim
- personal and household spending, including the personal share of phone, internet or vehicle use
- your own living costs, such as household groceries and clothes
- costs you can't document
- the full cost of equipment in the year of purchase (claim depreciation instead)
- expenses against income that is taxed as a final tax on the gross amount
If FBR finds a personal expense claimed as a business deduction, it will disallow it, recalculate your tax and may add penalties.
How to keep records FBR will accept
- Use a separate business bank account. It separates business from personal spending and makes your business activity easy to show.
- Get proper invoices. An invoice should show the supplier's name and NTN, the date, what was supplied and the amount.
- Go digital. Scan paper receipts, save emailed invoices and subscription receipts, and track income and expenses in accounting software or a spreadsheet.
- Reconcile regularly. Match your expense records to your bank statements every month, not once a year.
- Back up your records, so that a lost phone or laptop doesn't cost you your deductions.
- Keep records for six years from the end of the tax year they relate to.
Claiming expenses in your return
When you file on IRIS, enter your gross business receipts and your expenses in the business income section, and the system works out your net profit. Enter tax already deducted from your payments so it is credited against your liability. Then check that your wealth statement reconciles with your declared income. For the tax rates that apply to your profit, see the tax slab tables.
For other legal ways to reduce your tax, such as tax credits, see our tax saving guide. If you sell online, our e-commerce tax guide covers the expenses typical for online sellers.
Frequently asked questions
Can I deduct costs I incurred before my business formally started?
Costs incurred wholly and exclusively to start the business may be allowable even before formal registration. Such claims get close scrutiny, so keep strong documents and take advice on how to claim them.
I'm paid by foreign clients through Payoneer or bank transfer. Can I deduct my expenses?
It depends on how that income is taxed. If it qualifies for the IT export final tax treatment, expenses aren't deducted against it. If it's taxed under the normal regime, legitimate business expenses reduce your taxable profit. Resident taxpayers are generally taxed on income from foreign clients.
How long should I keep receipts?
Keep them for six years from the end of the tax year they relate to, in a form you can retrieve and show to FBR.
What happens if I claim something I shouldn't?
FBR can disallow the expense, recalculate your tax and impose penalties. Discrepancies are also a common trigger for FBR notices and audits.
This is general information, and tax rules change often. Check FBR's current notifications or ask a tax adviser about your own case.