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Understanding tax-deductible expenses for UK limited companies
Managing your finances effectively is one of the cornerstones of running a successful limited company. A crucial part of this process is understanding allowable expenses – business costs you can deduct from your profits to reduce your corporation tax liability.
This guide provides detailed insights into allowable expenses, practical examples, and tips to maximise your tax efficiency. Let’s make tax time less stressful and more rewarding for your business.
What are allowable expenses?
Allowable expenses are costs your business incurs exclusively for its operations. These can range from office supplies and employee salaries to travel expenses and professional fees. By deducting these costs, you effectively lower the taxable profits of your company.
However, it’s essential to note that these expenses must be:
- Wholly and exclusively for business purposes.
- Properly documented with receipts or invoices to back up your claim.
Failing to meet these requirements can lead to disallowed claims and possible penalties from HMRC.
Allowable vs non-allowable expenses
To simplify things, here’s a breakdown of common allowable and non-allowable expenses:
|
Category |
Allowable expenses | Non-allowable expenses |
|---|---|---|
| Staff costs | Salaries, employer NI contributions, recruitment fees, staff training programs, pensions | Wages paid to family members not working for the business, inflated salaries for tax benefits |
| Office costs | Office rent, business utilities (e.g., electricity, water), office supplies, IT equipment | Home rent or bills unrelated to business use, décor upgrades not tied to business operations |
| Travel & subsistence | Business-related train fares, hotel stays, parking fees, mileage (45p per mile for the first 10,000 miles and 25p per mile thereafter) | Personal travel, commuting costs to your regular workplace, speeding or parking fines |
| Marketing | Social media ads, email marketing software, branded promotional materials, business website development | Personal gifts with no clear marketing intent, extravagant sponsorships unrelated to the business |
| Equipment | Business-use computers, tools, office furniture, machinery | Equipment used primarily for personal use or with no clear business purpose |
| Entertainment | Meals with clients for business purposes, £150 per employee annual event allowance (Christmas parties, summer outings etc) | Lavish parties, personal celebrations unrelated to business, or unapproved employee gifts |
| Professional fees | Accountant fees, solicitor fees for contracts, subscriptions to professional bodies | Legal fees for personal disputes, fines or penalties imposed on the company |
| Insurance | Public liability insurance, professional indemnity insurance, employer’s liability insurance | Personal insurance policies, insurance for assets not tied to the business |
| Vehicle costs | Business-specific vehicle leasing, repairs, servicing, and fuel costs for company cars | Personal car usage, insurance on personal vehicles, speeding fines |
| Utilities | Proportional electricity, gas, and water bills for a home office, internet and phone bills for business | Entire household bills without clear business usage evidence |
| Subscriptions | Trade journals, industry-specific magazines, business software (e.g., Canva, Adobe, Xero) | Personal or entertainment-related subscriptions like Netflix |
| Training & development | Courses to upskill employees (e.g., Excel or leadership workshops) | Hobby-related courses or personal interest activities unrelated to business goals |
| Home office costs |
HMRC allows you to claim fixed flat-rate expenses at £312 per annum without providing detailed evidence of actual costs. |
Home office expenses without evidence of exclusive business use |
| Employee benefits | HMRC-approved trivial benefits under £50 (e.g., birthday gifts), £150 per employee for annual events | Benefits exceeding trivial limits without being taxed, extravagant non-business-related perks |
| Banking & finance | Bank fees for business accounts, loan interest on business-related borrowing | Overdraft fees or interest on personal accounts |
| Start-up costs | Company registration fees, market research, legal fees for setup | Personal expenses before the company was officially formed |
Actionable Checklist: Maximising Allowable Expenses
Use this checklist to ensure you’re claiming every allowable expense and staying compliant:
- Record all business-related costs
- Save receipts and invoices for rent, utilities, equipment, and travel.
- Maintain mileage logs for vehicle usage.
- Categorise expenses accurately
- Separate personal and business-related portions for mixed-use expenses.
- Use accounting software to classify expenses correctly.
- Keep proof of business purpose
- For meals, include client names and meeting details.
- Document how training courses or travel relate to your business.
- Claim Start-Up Costs
- Include pre-trading costs and initial setup expenses.
- Include pre-trading costs and initial setup expenses.
- Check for capital allowances
- Claim deductions for equipment and other large assets over time.
- Claim deductions for equipment and other large assets over time.
- Stay updated on HMRC rules
- Regularly review guidelines to stay compliant with changing regulations.
- Regularly review guidelines to stay compliant with changing regulations.
- Consult a professional accountant
- Have your claims reviewed for accuracy and completeness to avoid penalties.
- Have your claims reviewed for accuracy and completeness to avoid penalties.