20 Tax Allowable Expenses For Limited Companies
- Adil Akhtar
- 1 day ago
- 13 min read
The Audio Summary of the Key Points of the Article:
Your Guide to Slashing Corporation Tax with Allowable Expenses
What Does “Wholly and Exclusively” Mean for Your Business?
So, you’re running a limited company in the UK, and you want to keep your tax bill as low as legally possible. The golden ticket? Claiming allowable expenses—costs your business incurs that HMRC lets you deduct from your profits before calculating corporation tax. For 2025/26, corporation tax is 19% for profits up to £50,000, 25% above £250,000, with Marginal Relief for profits in between. Every pound you claim as an expense reduces your taxable profit, saving you 19-25p per pound. But there’s a catch: expenses must be wholly and exclusively for business purposes. Take Elowen, a Bristol-based graphic designer. She buys Adobe Creative Cloud for £600/year. Since it’s 100% for client work, it’s fully deductible. But if she uses it 20% for personal projects, only £480 qualifies. Mixed-use expenses need clear apportionment, and HMRC loves proof, like usage logs.
Why Are 2025 Tax Rules Different?
Now, let’s talk about what’s new for 2025/26. HMRC has tweaked a few rules that affect expense claims. National Insurance contributions for benefits in kind (like private medical insurance) are now 15%, up from 13.8% in 2024/25. Employers also pay a 1.25% Health and Social Care Levy on employee earnings, though reliefs apply for apprentices under 25 or employees under 21 earning less than £50,270. Mileage rates for business travel remain steady at 45p per mile for the first 10,000 miles (25p thereafter) for cars, 24p for motorbikes, and 20p for bicycles. Home office flat-rate allowances are still £6/week (£312/year), but you can claim proportional costs if you keep detailed records. These updates mean you need to stay sharp to maximize deductions while staying compliant.
2025/26 Tax Rates and Allowances | Details |
Corporation Tax | 19% (profits ≤ £50,000), 25% (profits > £250,000), Marginal Relief (£50,000-£250,000) |
National Insurance (Class 1A) | 15% on benefits in kind (e.g., medical insurance) |
Health and Social Care Levy | 1.25% on employee earnings, reliefs for under-25 apprentices |
Mileage Rates (Cars) | 45p/mile (first 10,000), 25p/mile (above 10,000) |
Home Office Flat Rate | £6/week (£312/year), or proportional costs with records |
How Long Must You Keep Expense Records?
Be careful! HMRC can knock on your door (figuratively) up to 6 years after you file your tax return to check your expense claims. For 2025/26, that means keeping records until at least April 2032. You need receipts, invoices, bank statements, and logs (e.g., mileage or home office usage). Digital tools like Xero or QuickBooks make this easier, but a spreadsheet works too if you’re disciplined. No records? HMRC may disallow your claims, hiking your tax bill. For example, in 2023, a Leeds-based consultancy lost £8,000 in deductions because they couldn’t produce mileage logs during an audit. Store everything securely, and consider backing up digitally to avoid heartbreak.
What Happens If You Claim Non-Allowable Expenses?
Now, nobody wants to tangle with HMRC, but claiming non-allowable expenses—like client lunches or personal gym memberships—can land you in hot water. These costs don’t meet the “wholly and exclusively” test, so they’re added back to your profits, increasing your tax liability. Worse, if HMRC suspects carelessness, they can investigate up to 6 years back; deliberate errors stretch to 20 years. Penalties range from 30% to 100% of the extra tax owed. In 2024, a Southampton retailer was fined £12,000 for claiming personal travel as business expenses. To stay safe, stick to HMRC-approved categories, keep meticulous records, and consult an accountant for grey areas like mixed-use assets.
The Ultimate List of Deductions for Your Limited Company
Can You Claim Home Office Costs as a Director?
Now, if you’re running your limited company from a spare room in your Birmingham flat, you’re probably wondering about home office expenses. Good news: you can claim a slice of your household costs if they’re used for business. HMRC offers a flat rate of £6 per week (£312/year for 2025/26) without needing receipts—perfect for simplicity. But if your office takes up, say, 10% of your home’s space, you can claim 10% of rent, utilities, and council tax, provided you keep detailed records. For example, Tamsin, a Cardiff-based consultant, claims £1,200 annually by apportioning her £12,000 rent and £2,400 utilities. Be careful, though—overclaim, and HMRC might question if your “office” is just your sofa. Keep a floor plan or usage log to back it up.
Is Client Entertainment Ever Deductible?
So, you took a client to a fancy London restaurant to seal a deal—can you claim it? Sorry, but HMRC says no to client entertainment costs like meals, theatre tickets, or golf days. These don’t meet the “wholly and exclusively” test, as they often have a personal enjoyment element. However, there’s a workaround: staff entertainment is deductible if it’s for employees only (e.g., a team Christmas party up to £150 per head, including VAT, per year). In 2024, a Manchester marketing firm saved £3,000 by hosting a staff-only event instead of client dinners. If clients attend, the whole cost is disallowed, so plan carefully.
How Do You Claim Mileage for Business Travel?
Now, let’s hit the road. If you use your personal car for business trips—like visiting a client in Leeds or a supplier in Glasgow—you can claim mileage at HMRC’s approved rates for 2025/26: 45p per mile for the first 10,000 miles, then 25p thereafter for cars; 24p for motorbikes; and 20p for bicycles. Commuting to your regular workplace doesn’t count, but travel to temporary sites does. For instance, Jago, an IT contractor in Newcastle, drove 12,000 business miles in 2024, claiming £5,000 (10,000 × 0.45 + 2,000 × 0.25). Keep a mileage log with dates, destinations, and purposes, as HMRC often audits these claims. Public transport like trains or buses is also deductible, but keep tickets or receipts.
2025/26 Mileage Rates and Flat-Rate Allowances | Details |
Cars (first 10,000 miles) | 45p per mile |
Cars (over 10,000 miles) | 25p per mile |
Motorbikes | 24p per mile |
Bicycles | 20p per mile |
Home Office Flat Rate | £6/week (£312/year) |
Subsistence (e.g., overnight stays) | Reasonable costs, receipts required |
What Are Trivial Benefits and Why Do They Matter?
None of us wants to overcomplicate taxes, but trivial benefits are a gem for limited companies. These are small perks for employees (including directors) that HMRC allows tax-free, up to £50 per benefit (including VAT) and £300 annually for directors. Think a £40 gift card for hitting a sales target or a £30 team lunch. In 2023, a Bristol retailer gifted each employee a £45 hamper, saving £900 in tax and NI. The catch? Benefits must not be cash, vouchers, or contractual (e.g., part of your salary). Document each benefit with receipts and a note of its purpose to keep HMRC happy.
Can You Deduct Bad Debts or Sponsorship Costs?
Now, consider this: a client stiffs you on a £5,000 invoice, or you sponsor a local Liverpool charity event. Can you claim these? Bad debts are deductible if you’ve included the income in your accounts and can prove the debt is irrecoverable (e.g., client bankruptcy). In 2024, a Sheffield consultancy wrote off £10,000 in bad debts, reducing their taxable profit. For sponsorship, costs like funding a local football team’s kit are deductible if they promote your business (e.g., your logo on shirts). But personal donations or non-promotional sponsorships don’t qualify. Keep contracts or emails showing the business link.
The Full List of 20 Allowable Expenses
Here’s the meaty bit—20 tax allowable expenses for your limited company in 2025/26, grouped for clarity. Each must be wholly and exclusively for business, with records to prove it.
Office Costs
Stationery: Pens, paper, printer ink (e.g., £200/year for a small office).
Phone and Internet: Business portion of bills (e.g., 80% of a £50/month mobile bill).
Postage and Courier: Shipping client goods or documents.
Home Office: £6/week flat rate or proportional costs.
Equipment: Computers, desks, software (e.g., £1,000 laptop, fully deductible if business-only).
Travel and Subsistence
6. Mileage: 45p/25p for cars, 24p for motorbikes, 20p for bicycles.
7. Public Transport: Train or bus fares for business trips (not commuting).
8. Parking and Tolls: Fees for business travel (e.g., M6 toll).
9. Subsistence: Meals or hotels during business trips (reasonable costs, receipts needed).
10. Accommodation: Overnight stays for work (e.g., £120/night in London).
Employee Costs
11. Salaries: Employee wages, including directors (NI at 15% for benefits).
12. Pension Contributions: Employer contributions up to £60,000/year per employee.
13. Training: Courses to improve employee skills (e.g., £500 coding BootCamp).
14. Trivial Benefits: Up to £50 per benefit, £300/year for directors.
15. Eye Tests and Glasses: For employees using screens (if work-related).
Professional Costs
16. Accountancy Fees: Tax preparation or bookkeeping (e.g., £1,500/year).
17. Legal Fees: Business-related advice (e.g., contract disputes).
18. Professional Subscriptions: Fees for HMRC-approved bodies like ACCA or ICAEW.
Other Costs
19. Bad Debts: Irrecoverable client payments included in income.
20. Sponsorship: Promotional costs with a business link (e.g., £2,000 for a local event).
Step-by-Step Guide: How to Claim Expenses on Your Corporation Tax Return
Right, let’s get practical. Claiming expenses correctly ensures you save tax without HMRC headaches. Follow these steps for 2025/26:
Track Expenses: Record every expense with receipts, invoices, or logs (e.g., mileage or home office usage). Use software like Xero or a spreadsheet.
Categorize Costs: Group expenses (e.g., office, travel) and ensure they meet the “wholly and exclusively” rule. Apportion mixed-use costs.
Calculate Deductions: Total allowable expenses (e.g., £10,000 in mileage, £312 home office). Check HMRC rates for mileage or flat allowances.
File Your Return: Enter expenses in your CT600 form (due 12 months after your accounting period). Use Box 30 for total allowable expenses.
Keep Records: Store evidence for 6 years. For example, in 2024, a Glasgow contractor avoided penalties by showing detailed mileage logs during an audit.
Check for Errors: Review for non-allowable costs (e.g., client entertainment). Consult an accountant for complex claims like bad debts.
Case Study: Navigating IR35 and Expenses
Meet Lowen, a Manchester-based IT contractor caught by IR35 in 2024. Under IR35, his limited company can’t claim expenses like travel or subsistence for assignments at a client’s site, as he’s deemed an employee. However, he claims £6/week for his home office, £1,200 for accountancy fees, and £500 for professional subscriptions. By keeping meticulous records and consulting an accountant, Lowen deducts £2,500, saving £475 in corporation tax (19% rate). IR35 limits some claims, so check your status with HMRC’s CEST tool.
Top Tips to Stay HMRC-Compliant and Save More
How Can You Maximize Deductions Without Triggering an Audit?
Now, let’s get savvy about boosting your tax savings while keeping HMRC off your back. The key is to claim every allowable expense but play by the rules. For 2025/26, focus on high-impact deductions like pension contributions (up to £60,000 per employee) or equipment costs, which can slash your taxable profits significantly. For example, if your company buys a £5,000 server, you can deduct the full cost, saving £950-£1,250 depending on your corporation tax rate (19% or 25%). But here’s the trick: document everything meticulously. Use apps like Receipt Bank to scan receipts instantly, and log mileage or home office use weekly. Overclaiming—like trying to deduct your daily commute—raises red flags. In 2024, HMRC audited 12% of small businesses for expense errors, so stick to the “wholly and exclusively” rule and keep records for 6 years.
What Should You Do If HMRC Questions Your Claims?
Be careful! An HMRC enquiry can feel like a tax nightmare, but staying calm and prepared keeps you in control. If HMRC questions your 2025/26 claims, respond promptly with evidence: receipts, invoices, logs, or contracts. For instance, in 2023, a London-based retailer, Morwenna, faced an audit over her £2,000 home office claim. She provided a floor plan showing her office used 15% of her flat and utility bills, proving the deduction. HMRC closed the case without penalties. If you’re unsure, hire an accountant to handle correspondence—they’ll know how to navigate HMRC’s queries. Ignoring letters or fudging records can lead to penalties of 30-100% of the tax owed, so transparency is your best mate.
Are There Tools to Simplify Expense Tracking?
Now, nobody loves paperwork, but digital tools can make expense tracking a breeze. For 2025/26, software like Xero, QuickBooks, or FreeAgent lets you categorize expenses, scan receipts, and integrate with your bank account. These tools flag non-allowable costs (like client entertainment) and generate reports for your CT600 form. For example, a Leeds-based graphic designer, Tegan, uses Xero to track £8,000 in annual expenses, saving 10 hours a month on admin. Free versions like Wave work for smaller companies, but paid plans (from £8/month) offer HMRC-compliant reporting. If you’re old-school, a spreadsheet works, but automate where possible to avoid errors. HMRC’s Making Tax Digital rules may expand to corporation tax by 2027, so going digital now future-proofs your business.
Why Consult an Accountant for Complex Expenses?
So, the question is: when do you need a pro? For straightforward claims like stationery or mileage, you might manage alone. But complex areas—like bad debts, mixed-use assets, or IR35 restrictions—call for an accountant. In 2024, a Southampton contractor, Idris, miscalculated a £15,000 bad debt deduction, triggering a £3,000 tax bill correction. His accountant renegotiated with HMRC, reducing penalties to £500. Accountants also spot niche deductions, like capital allowances for equipment or R&D tax relief for tech firms, which can save thousands. Expect to pay £1,000-£2,000 annually for a good accountant, but the tax savings often outweigh the cost. Check they’re ACCA or ICAEW-accredited for peace of mind.
Common Non-Allowable Expenses to Avoid (2025/26) | Why It’s Not Deductible |
Client Entertainment | Personal enjoyment element; doesn’t meet “wholly and exclusively” rule |
Commuting Costs | Regular travel to workplace isn’t business-related |
Personal Expenses | E.g., gym memberships, personal clothing (even if branded) |
Fines and Penalties | E.g., parking fines or late tax penalties |
Non-Promotional Sponsorship | Donations without business promotion |
Case Study: Surviving an HMRC Audit
Let’s talk about Kensa, a London-based retailer audited by HMRC in 2024 for her £4,000 home office claim. She claimed 20% of her rent and utilities, but HMRC questioned if the space was exclusively for business. Kensa provided a usage log showing 30 hours of weekly work in her office, plus receipts for electricity and internet. She also clarified that her desk wasn’t used for personal tasks. The audit closed with her deduction upheld, but it cost her £500 in accountancy fees to navigate. Lesson? Detailed records and a clear business purpose are your shield against HMRC scrutiny. For 2025/26, review your claims monthly to catch errors early.
Summary of the Most Important Points
Claim allowable expenses to reduce your 2025/26 corporation tax, charged at 19% for profits up to £50,000 or 25% above £250,000.
Expenses must be “wholly and exclusively” for business, with clear apportionment for mixed-use costs like home offices.
Keep receipts, invoices, and logs for 6 years to satisfy HMRC’s record-keeping rules.
Deduct office costs like stationery, phone bills, and equipment, but avoid non-allowable expenses like client entertainment.
Claim mileage at 45p per mile for the first 10,000 miles (25p thereafter) for cars, with logs to prove business use.
Employee costs like salaries, pensions (up to £60,000/year), and trivial benefits (£50 max) are tax-deductible.
Professional fees, such as accountancy or HMRC-approved subscriptions, reduce your taxable profits.
Niche deductions like bad debts or promotional sponsorships require proof of business purpose.
Use digital tools like Xero or QuickBooks to track expenses and prepare for Making Tax Digital compliance.
Consult an accountant for complex claims or HMRC audits to avoid penalties of 30-100% of tax owed.
FAQs
Q1: **What is the deadline for filing a corporation tax return for a limited company in the UK?**
A1: A limited company must file its corporation tax return (CT600) with HMRC within 12 months after the end of its accounting period.
Q2: **How can a limited company pay its corporation tax bill?**
A2: A limited company can pay its corporation tax bill via bank transfer, online banking, debit or credit card, or through a direct debit arrangement with HMRC.
Q3: **What happens if a limited company misses the corporation tax payment deadline?**
A3: Missing the payment deadline incurs interest on the unpaid tax and potential penalties, starting at £100 for late payment, escalating for repeated delays.
Q4: **Can a limited company claim VAT on allowable expenses?**
A4: If VAT-registered, a limited company can reclaim VAT on allowable expenses, provided they relate to taxable business activities and are supported by valid VAT invoices.
Q5: **Are there any tax reliefs available for research and development expenses?**
A5: Limited companies can claim R&D tax relief, allowing enhanced deductions or cash credits for qualifying research and development costs.
Q6: **Can a limited company deduct costs for business insurance?**
A6: Yes, a limited company can deduct premiums for business insurance, such as public liability or professional indemnity, if wholly for business purposes.
Q7: **How does a limited company handle expenses incurred before incorporation?**
A7: Pre-incorporation expenses can be claimed if they were wholly for the business and incurred within 7 years before trading began, treated as incurred on the first day of trading.
Q8: **Are bank charges deductible for a limited company?**
A8: Business-related bank charges, such as transaction fees or account maintenance costs, are deductible, but personal account charges are not.
Q9: **Can a limited company claim expenses for marketing and advertising?**
A9: Costs for marketing and advertising, like website development or online ads, are deductible if they promote the business.
Q10: **What are the rules for claiming uniform or protective clothing expenses?**
A10: A limited company can deduct costs for uniforms or protective clothing required for work, but not for everyday clothing, even if branded.
Q11: **Can a limited company deduct costs for business gifts?**
A11: Business gifts costing up to £50 (excluding VAT) per recipient are deductible, provided they carry a conspicuous business advertisement and are not food, drink, or tobacco.
Q12: **Are lease payments for business premises deductible?**
A12: Lease or rental payments for business premises, like offices or shops, are deductible if used exclusively for business activities.
Q13: **Can a limited company claim expenses for staff welfare facilities?**
A13: Costs for staff welfare facilities, such as tea, coffee, or workplace rest areas, are deductible if provided for employees’ benefit.
Q14: **How are capital allowances different from allowable expenses?**
A14: Capital allowances provide tax relief on certain capital assets, like machinery, over time, while allowable expenses are deducted fully in the year incurred.
Q15: **Can a limited company deduct costs for repairing business assets?**
A15: Repair costs for business assets, like fixing office equipment, are deductible, but improvements or upgrades may qualify as capital expenditure.
Q16: **Are professional indemnity insurance premiums deductible?**
A16: Premiums for professional indemnity insurance are deductible if the coverage is necessary for the company’s business operations.
Q17: **Can a limited company claim expenses for trade show participation?**
A17: Costs for attending or exhibiting at trade shows, including booth fees and travel, are deductible if they promote the business.
Q18: **What are the tax implications of providing employee childcare?**
A18: A limited company can provide up to £55 per week per employee for childcare tax-free, or claim deductions for workplace nursery costs, subject to HMRC rules.
Q19: **Can a limited company deduct costs for software subscriptions?**
A19: Software subscriptions, like accounting or CRM tools, are deductible if used wholly for business purposes.
Q20: **Are expenses for maintaining a company website deductible?**
A20: Costs for designing, hosting, or maintaining a company website are deductible, as they are considered business-related advertising expenses.
About The Author:
Adil Akhtar, ACMA, CGMA, CEO and Chief Accountant of Pro Tax Accountant, is an esteemed tax blog writer with over 10 years of expertise in navigating complex tax matters. For more than three years, his insightful blogs have empowered UK taxpayers with clear, actionable advice. Leading Advantax Accountants as well, Adil blends technical prowess with a passion for demystifying finance, cementing his reputation as a trusted authority in tax education.
Email: adilacma@icloud.com
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