What Allowable Expenses can Limited Companies Claim

Operating a limited company in the UK offers numerous advantages, including limited liability and potential tax benefits. One of the significant advantages is the ability to claim various business expenses as tax-deductible, thereby reducing your taxable profit and ultimately the amount of Corporation Tax you owe. Understanding what qualifies as a tax-deductible expense is crucial for ensuring your company remains tax-efficient and compliant with HMRC regulations. This guide provides an in-depth look at the key tax-deductible limited company expenses in the UK.

Tax-deductible expenses are the costs a business can subtract from its income to lower its taxable profit. For example, if your revenue is £35,000 and your allowable expenses total £5,000, you'll be taxed on £30,000. For an expense to be deductible, it must be "wholly and exclusively" for the purpose of the business. If an expense is both for personal and business use, you can only claim the business part.

Knowing which expenses qualify as allowable is essential to ensure compliance with HMRC regulations and make the most of available tax reliefs.

Fundamental Rules for Limited Company Expenses

Understanding the rules for what counts as a deductible expense is crucial for managing your limited company’s finances effectively. Here are the key rules to keep in mind:

1. Wholly and Exclusively for Business: You can only claim expenses incurred wholly and exclusively during the everyday running of your business. For example, If you buy office supplies solely for business use, you can claim the full cost as a deductible expense.
2. ‍Avoiding Dual-Purpose Expenses: You can’t claim expenses that have a dual purpose for business and personal use. For example, if you extend a business trip abroad for leisure purposes, you can only claim expenses for the business days, not the additional leisure days.
3. Proper Payment Method: Business expenses can be paid through your company’s business bank account, or you can reclaim the costs of business expenses paid by you and later reimbursed via your company. For example, if you pay for a business lunch with a client using your personal funds, you can reimburse yourself from the company’s bank account later.
4. Offsetting Against Corporation Tax: Most limited company expenses can be offset against your company’s Corporation Tax liability, with some exceptions like business entertainment. For example, office rent is a deductible expense that can be offset against Corporation Tax, whereas taking clients out for entertainment is not deductible.
5. Record Keeping: Keep detailed records of all expenses, including receipts, invoices, and bank statements. Maintain an accurate record of pre-formation and running costs, including VAT receipts. Keep receipts for office supplies and travel tickets so you can justify these expenses if HMRC queries them.
6. Necessary and Reasonable: Expenses should be necessary for business operations and reasonable in amount. For example, a company laptop for business use is necessary and reasonable, whereas a luxury watch would not be.
7. Proper Classification: Correctly categorize expenses to ensure they are claimed appropriately. Classify a business lunch under 'meals and entertainment' and office rent under 'office costs'.
8. Timing: Claim expenses in the correct accounting period. If you incur a business expense in March but pay it in April, it should be claimed in the March accounting period.

As a limited company director, you want to run your business in the most tax-efficient way possible.

One way to achieve this is to correctly claim for allowable business expenses so that you don't have to pay more tax than you are legally obliged to.

We'll run through the different expenses you can claim as a limited company director:

1. Employee Expenses

2. Business Entertainment Expenses

3. Business Travel Expenses

4. Office-related Expenses

5. Mobile Phone, Landline and Broadband Expenses

6. Professional Services Expenses

7. Financial and Legal Expenses

8. Marketing, Advertising and PR Costs

9. Professional Development Expenses

10. Eye Test Expenses and Glasses

11. Books, Journals and Magazines

12. Website Development Costs

13. Donations

1. Employee Expenses

Allowable Employee Expenses List:

Employee or staffing expenses refer to the costs related to employing and supporting the workforce within the business. Some examples of allowable staffing expenses include:

1. Salary - The salary and National Insurance contributions (NIC) you receive as an employee of your company can be claimed as allowable expenses. If your salary exceeds the NIC threshold, you must pay NICs
2. Christmas party and annual event expenses - You can claim the costs of hosting an annual staff party as long as the following conditions apply:
   - Your cost per person shouldn't exceed £150 (including VAT). Your employees may invite a partner; if they do, your total budget for an employee and an additional guest will be £300.
   - The main purpose of the event is to entertain your staff members. As such, most of the event attendees should be your employees.  Note that the per-person budget of £150 applies annually, so you can claim for several staff events as long as the costs fall within the budget. See EIM21690 for more information.‍
3. Lunch Expenses - When your employees are performing their work duties, it's common for them to encounter personal expenses, such as purchasing lunch while on assignments or incurring travel costs to meet clients. As an employer, you have the option to reimburse these expenses to your employees through the payroll system. This means that you can compensate them for the money they spent on these work-related expenses, ensuring that they are not financially burdened by these costs. ‍
4. Gifts and trivial benefits - You're not required to pay tax and National Insurance contributions, nor notify HMRC about gifts or trivial benefits for an employee if it meets the following conditions:
   - It costs £50 or less to provide
   - It isn't a cash or cash voucher
   - It's not a reward for their performance
   - It's not included in terms of their contract
   - The total does not exceed £300 in the financial year.... You must pay tax on gifts and benefits that don't meet the above conditions.‍
5. Healthcare expenses - If you provide private medical insurance for an employee, this is considered a benefit in kind. You must pay National Insurance contributions at 15.05% (2022/23 tax year), and your employee will pay personal tax.  From 6 April 2023, employers are liable to pay an additional 1.25% as a separate health and social care levy. The new social care levy will apply to employee deductions, including earnings of employees above the state pension age. However, existing reliefs will continue to apply to apprentices under 25 and employees under 21 earning less than £50,270 annually. Not that even though the rate of national insurance is set to increase for the 2022-2023 tax year, the threshold at which national insurance starts to be paid will also increase. This will reduce the overall national insurance bill or offset some of the additional contributions that must be made. The following health benefits are exempt, so you're not required to report to HMRC, or pay tax and National Insurance on the following:
   - Medical check-up or health screening (one check-up per year is exempt)
   - Medical insurance or treatment for an employee working overseas‍
6. Childcare costs - As of 4 October 2018, the Childcare Voucher scheme has been phased out by the government, so new applicants are no longer accepted. If you've set up for this scheme, you can go on receiving and using the vouchers as long as the scheme continues to run. Parents can now apply to the Tax-Free Childcare scheme. This initiative was rolled out in 2017 and was designed to replace employer-supported childcare gradually. Under the scheme, the government will contribute 20p for every 80p you pay, up to a threshold of £2,000. This means you'll receive £2,000 per year for each child, for childcare costs of up to £10,000. Further information is available on the Gov.uk website. ‍
7. Pension contributions - After you've set up an agreement with a pension provider, you can contribute to your pension and get 100% tax relief as an allowable expense. Your contributions are tax-free as long as the amount falls under the annual allowance. The annual allowance is rising to £60,000 on 6 April 2023. It is £40,000 for the 2022/23 tax year and £60,000 for 2023/24 and beyond. The allowance covers all your private pensions, including your personal and workplace pensions. Bear in mind that pension decisions are often complicated and require careful consideration. We recommend speaking with a financial advisor for personalised advice before you make any contributions.

2. Business Entertainment Expenses

You can claim for the costs of entertaining or potential clients. However, these aren't allowable deductions for Corporation Tax purposes.

3. Business Travel Expenses

Limited Company Travel Expenses

Limited Company Mileage Allowance

As a limited company director, you can claim back mileage from HMRC if you use your vehicle for business trips and have paid for the fuel costs. HMRC defines these trips as journeys you make 'wholly and exclusively' for business purposes. These include:

1. Trips taken to complete work (i.e. deliveries)
2. Trips between two workplaces for the same job
3. Going from an employee's home to a client
4. Going to a temporary workplace

You can claim the following rates:

‍

‍Note: You can only claim the cost of fuel if your company owns the car.

Business Travel Expenses

You can claim travel-related expenses if the trip is made wholly and exclusively for business purposes and isn't considered 'ordinary commuting'. According to HMRC, a commute is defined as a trip that you make between your home and a permanent workplace. You can claim the following:

1. Costs associated with running a car or vehicle, such as fuel expenses, parking fees, tolls, vehicle insurance and vehicle repairs and servicing
2. Transport fares for flights, as well as rides taken via train, bus, taxi and ferries
3. Meals and accommodation for overnight business trips

4. Office-related Expenses

Use of Home as Office Limited Company

1. Claiming a Flat Rate

If you use your home office, you can claim a rate of £6 per week as allowable business expenses.

HMRC doesn't require you to keep a receipt for this. Additionally, this isn't considered a benefit in kind, so you don't have to pay tax on the amount.

2. Apportionment of Home Bills

Alternatively, you can claim a proportion of household costs used by the business. The allowable expenses you can claim will vary depending on the situation. You can typically claim for utilities and other household expenses (but only for mortgage and council tax if you are self-employed).

This method requires you to work out the rooms you use for your business, the amount of time you use these rooms for business activities and the proportion of your utilities that you can allocate to business use.

For example, you may dedicate your study room for business purposes for half a day during the weekdays and require lighting and heating for all your hours spent on business activities.

A rental agreement must be established between you (the homeowner) and your limited company to claim proportional costs. The rules can be complicated, so we recommend consulting an accountant before you set up a rental agreement.

General Office Expenses

You can claim for basic office expenses, such as postage, stationery, printing costs, accountancy and other consumable office supplies.

Stationery and Equipment Expenses

Computers, printers and software are examples of equipment you can claim as business expenses.

You can also claim office furnishings like tables and chairs as long as they are primarily used for business purposes.

Plant and Machinery

From 1 April 2021 until 31 March 2023, a 130 per cent super-deduction applied. Companies purchasing qualifying plant and machinery assets could have claimed a 130% super-deduction capital allowance and a 50% first-year allowance for qualifying special rate assets.

These reliefs only applied to businesses subject to corporation tax, so they weren't available for sole traders, partnerships or limited liability partnerships. They applied only to purchasing new plants and machinery (including computing equipment), not second-hand assets.

Under the Annual Investment Allowance (AIA), businesses could have claimed tax relief on 100 percent of plant and machinery investments up to the threshold (currently £1 million).

Further information is available on HMRC's factsheet.

5. Communications: Mobile Phone, Landline and Broadband Expenses

1. Mobile Phone Expenses

If your mobile phone contract is between your company and the provider and is used solely for business purposes, you can claim the entire bill as an allowable expense.

You can claim the costs incurred for business calls if you have a personal contract. You're also able to reclaim the VAT element of the business calls.

Further information is available in our guide to claiming mobile phone expenses when self-employed.

2. Landline Expenses

If your landline contract is solely for business use, you can claim the cost as an allowable expense. You can also claim for business calls you've made using your home phone line.

3. Broadband Expenses

If your residential broadband contract is in your company's name, you can claim a full deduction for the expense provided that personal use of the broadband connection is 'insignificant'.  

If the connection is used for business and personal purposes, you'll need to pay a benefit-in-kind charge on the amount paid for by the company.

If you have a personal broadband plan, you can claim the costs of using the broadband connection for business activities. You'll need to show your business and personal usage separately, such as providing a copy of an itemised bill.

6. Professional Services Expenses

Business Insurance

You can claim insurance policy costs if you prove the policy is strictly taken up for business purposes.

Common types of include professional indemnity, public liability, employer's liability and business contents.

Company Formation Costs

The costs you incur to register your company can be claimed as allowable expenses. These costs can range from fees for professional services to printing costs, equipment purchases and software expenses.

7. Financial and Legal Expenses

1. Professional Fees Expense

The costs incurred for engaging professional services - such as hiring an accountant, lawyer or architect - can be claimed as an allowable expense if these services are carried out solely for business purposes.

2. Bank, Credit Card and Other Financial Costs

Bank charges, including credit card fees and loan interest, can be claimed as business expenses.

3. Bad Debts like Unpaid Invoice

Company expenses related to bad debt, such as unpaid invoices, occur when a business is unable to collect payment from a customer or client. It is considered an expense because the expected revenue from the sale or service has not been received, resulting in a financial loss for the company.

To claim bad debts as a business expense, the value of the transaction needs to be included in your company's turnover, and you must be sure that your customer will not recover the debts.

8. Marketing, Advertising and PR Costs

You can reclaim your marketing, advertising and PR expenses as long as these are used solely for business purposes. This applies to both one-off costs and ongoing fees.

Here are a few examples of common marketing and advertising expenses you may incur:

• Creating a website
• Costs of web hosting
• Purchase of domain names
• Online and print ads

9. Professional Development Expenses

Professional development costs can be claimed as an allowable expense if the course content directly relates to your trading activity.

Training courses you attend to learn a new skill - which you can use to expand into a new industry or offer different services - aren't allowable unless you can show that these courses are helping you build up on your existing skills or knowledge.

Professional Subscription

Subscriptions can be claimed as an allowable expense as long as these subscriptions are directly relevant to your business and are included in the HMRC list of approved professional bodies.

10. Eye Test Expenses and Glasses

You can claim for vision tests only if you must use visual display equipment as part of your day-to-day work.

The costs of glasses or contact lenses can be claimed only if these are prescribed for screen-based work and aren't a general prescription.

11. Books, Journals and Magazines

You can only claim the cost of magazine subscriptions, books and journals if they are relevant to your business.

For example, industry-specific journals related to your profession, like a journal on decarbonisation, could be deemed relevant as they could be a source of information to help you stay up-to-date with the latest developments.

12. Website Development Costs

Building a website could be claimed as an expense if the money earned from the website exceeds the cost of developing the website.

It is always good to speak to your accountant to determine eligibility.

13. Donations

While donations aren't considered allowable business expenses, they are deductible against your Corporation Tax bill.

This applies when you gift the following to a charity:

• money
• equipment or trading stock (items that your business makes or sells)
• land, property or shares in another company (shares in your own company don't qualify)
• employees (on secondment)
• sponsorship payments

Using limited company expenses offers several advantages for businesses. Here are some key benefits:

1. Reduced Taxable Profits

Claiming allowable business expenses reduces your company's taxable profit, which directly lowers your Corporation Tax liability. This can lead to significant tax savings and more funds available for reinvestment in your business.

2. Enhanced Cash Flow

By claiming expenses, you can improve your company’s cash flow. Money spent on allowable business expenses reduces your overall tax liability, freeing up cash that can be used for other essential business activities. This improved cash flow can help in managing day-to-day operations, funding growth initiatives, and ensuring financial stability.

3. Maximizing Profitability

Properly managing and claiming expenses ensures that your business retains as much profit as possible. By effectively reducing the taxable amount, you increase the net profit that can be distributed to shareholders or reinvested in the company. This maximization of profitability is crucial for the long-term success and growth of your business.

4. Legitimate Cost Recovery

Running a business incurs various costs, from office supplies to travel expenses. Claiming these costs as business expenses allows you to recover some of these expenditures legitimately. This means you can operate more efficiently, knowing that the costs incurred in running your business can be offset against your tax bill.

5. Improved Financial Planning

By keeping a detailed record of all business expenses, you can gain better insights into your company's spending patterns. This detailed record-keeping aids in more accurate budgeting and financial planning. Understanding where your money is going helps in making informed decisions about cost management and resource allocation.

6. Professional Image

Maintaining clear and accurate financial records, including detailed expense claims, can enhance your company’s professional image. It demonstrates to stakeholders, including investors and auditors, that your business is well-managed and compliant with tax regulations. This professionalism can lead to increased trust and credibility in the business community.

7. Employee Benefits

Claiming expenses related to employee benefits, such as training, travel, and accommodation, can enhance employee satisfaction and retention. When employees know that their legitimate work-related expenses will be covered, it boosts morale and can improve productivity. Offering such benefits can also make your company more attractive to top talent.

8. Tax-Efficient Remuneration

Directors and employees of a limited company can claim expenses as part of a tax-efficient remuneration package. Instead of higher salaries, which are subject to income tax and National Insurance contributions, expenses can be reimbursed tax-free. This approach can lead to overall tax savings for both the company and its employees.

9. Investment in Business Growth

Reinvesting the money saved from tax-efficient expense claims can fund further growth and development. Whether it’s upgrading equipment, expanding into new markets, or increasing marketing efforts, these investments can drive the business forward. Effective expense management ensures that more of your revenue is directed towards growth rather than tax payments.

10. Compliance and Audit Readiness

Maintaining accurate records of business expenses ensures compliance with HMRC regulations, reducing the risk of penalties and fines during audits.

11. Utilizing Tax Reliefs and Allowances

Certain expenses, such as Research and Development (R&D) costs, may qualify for additional tax reliefs or allowances, providing further tax savings.

To claim tax-deductible expenses, follow these steps:

1. Understand Allowable Expenses: Get familiar with the types of expenses that are eligible for tax deductions. In the UK, allowable expenses typically include costs that are incurred wholly and exclusively for business purposes.
2. Keep Accurate Records: Maintain detailed records of your expenses, including receipts, invoices, and supporting documents. These records will serve as evidence to support your claims and comply with HMRC requirements.
3. Classify Your Expenses: Categorize your expenses into appropriate categories, such as office expenses, travel costs, professional fees, or marketing expenses. This will help you accurately report them on your tax return.
4. Use the Correct Payment Method
   
   • Company Bank Account: Ideally, pay for business expenses directly from your company’s bank account to keep transactions clear and easy to track.
   • Personal Reimbursements: If you pay for a business expense personally, you can reclaim the cost from your company later. Ensure you keep receipts and document the reimbursement accurately.
5. Complete Your Self-Assessment Tax Return: If you're self-employed or a director of a limited company, you will need to complete a self-assessment tax return. Include your tax-deductible expenses in the relevant sections of the form, such as the "Self-Employment" or "Business Expenses" section.
6. Seek Professional Advice: If you're unsure about which expenses are tax-deductible or how to accurately claim them, it's advisable to consult with qualified limited company accountants. They can provide personalized guidance based on your specific circumstances and help you maximize your allowable deductions.
7. Retain Documentation: Keep your expense records and supporting documents for at least five years, as HMRC may request to review them for audit purposes.

1. Operating Expenses:
   - Rent and utilities
   - Office supplies and equipment
   - Insurance premiums
   - Business rates
   - Telephone and internet expenses
   - Property maintenance and repairs
   - Business insurance
2. Professional Services:
   - Accounting and bookkeeping fees
   - Legal fees
   - Consultancy and advisory services
   - IT and software services
   - Marketing and advertising expenses
   - Professional membership fees
   - Training and development costs
3. Staffing Expenses:
   - Employee salaries and wages
   - Employer National Insurance contributions
   - Pension contributions
   - Recruitment expenses
   - Staff training and development costs
   - Employee benefits (such as health insurance or childcare vouchers)
4. Travel and Subsistence:
   - Business-related travel expenses
   - Accommodation costs during business trips
   - Meals and entertainment expenses
   - Mileage or vehicle expenses
5. Business Premises:
   - Rent or mortgage payments for business premises
   -Property insurance
   - Business rates and council tax
   - Maintenance and repairs
6. Office Expenses:
   -Office furniture and equipment
   - Printing and stationery
   - Computer hardware and software
   -Postage and delivery costs
7. Marketing and Advertising:
   - Website development and maintenance
   - Advertising campaigns
   - Graphic design and printing
   - Online marketing expenses
8. Financial and Bank Charges:
   - Bank fees and charges
   - Merchant service fees
   - Interest on business loans or overdrafts
   - Professional fees for financial services

Non-allowable limited company expenses refer to costs that are not eligible for tax deduction or cannot be claimed as legitimate business expenses. Here are some common examples:

1. Personal expenses: Any expenses that are purely personal in nature, such as personal clothing, personal travel, or personal entertainment, cannot be claimed as business expenses.
2. Fines and penalties: Fines, penalties, and legal fees incurred as a result of breaking the law or regulations are generally not allowable expenses.
3. Capital expenses: Costs associated with purchasing or improving fixed assets, like property or equipment, are typically considered capital expenses and are not fully deductible in the year of purchase. Instead, they are typically claimed through capital allowances over a period of time.
4. Dividends: Dividend payments made to shareholders are not considered allowable expenses. Dividends are distributed from profits after tax and are subject to dividend tax rather than being deductible as an expense.
5. Private healthcare and insurance premiums: Personal health insurance or private medical expenses are generally not allowable as business expenses.
6. Entertaining clients: Expenses incurred for purely entertainment purposes, such as lavish client dinners or tickets to sporting events, are usually not allowable as business expenses.

Frequently Asked Questions on Limited Company Expenses

1. How Much Does an Accountant Cost for a limited company in 2024?
   The cost of hiring an accountant for a limited company in 2024 can vary depending on factors such as the size and complexity of your business, the scope of services required, and the accountant's location and experience. On average, you can expect fixed fee packages ranging from £1,000 to £5,000 or more per year, and hourly rates between £75 to £150 or more. Additional services and online accounting software may have separate costs.
2. Can I claim for my business vehicle as a tax deduction if I don't own it myself?
   ‍Yes, you can claim for your business vehicle as a tax deduction even if you don't own it yourself. If you use a vehicle for business purposes, you can claim the expenses associated with its use as a tax deduction. This applies whether you buy the vehicle, lease it, or use it under a hire or rental agreement. However, it's important to note that the specific tax rules and allowable deductions may vary depending on factors such as the type of vehicle, its usage, and the tax regulations in your jurisdiction. Consulting with an accountant or tax advisor is recommended to ensure compliance and maximize your eligible deductions.
3. Are all revenue expenses allowable for tax purposes?
   Not all revenue expenses are allowable for tax purposes. While many revenue expenses incurred for the purpose of running the business are typically allowable, there are certain expenses that may not be eligible for tax deductions. Some common examples of non-allowable expenses include personal expenses, fines and penalties, capital expenditures, and expenses not supported by appropriate documentation.
4. What expenses can I claim for employees?
   Common expenses you can claim for employees include salaries and wages, employer National Insurance contributions (NICs), and pension contributions.
5. Should I buy or rent my office space for my limited company?
   The decision to buy or rent office space for your limited company depends on various factors such as your budget, long-term plans, and specific business needs. Renting provides flexibility and lower upfront costs, while buying offers long-term stability and potential investment benefits. Consider your financial situation, growth projections, and the local property market before making a decision.
6. Can I claim rent as a business expense limited company?
   ‍Yes, you can claim rent as a business expense for your limited company, as long as it is incurred solely for business purposes.
7. Can you claim food expenses in Ltd company?
   Yes, you can claim food expenses as a limited company under certain circumstances. If the food expenses are incurred wholly and exclusively for business purposes, such as business meetings or when traveling for business, they may be considered allowable expenses.

Understanding and effectively managing tax-deductible expenses is important for maintaining the financial health of your limited company. By diligently tracking and claiming eligible expenses, you can significantly reduce your taxable profit and, consequently, your Corporation Tax bill. This not only improves your cash flow but also supports better budgeting, financial planning, and compliance with HMRC regulations.

However, the complexities of tax laws and the need for meticulous record-keeping can be daunting. To ensure your business maximizes its tax efficiency while remaining compliant, it is highly advisable to hire experienced limited company accountants who can provide you with expert guidance tailored to your specific business needs, helping you manage the complexity of tax-deductible expenses with ease.

Book a free consultation with a qualified accountant today and get professional help to make the most of your tax-deductible expenses.