Limited company expenses & tax allowances guide

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 claim for allowable business expenses correctly, so that you don't wind up having to pay more tax than you are legally obliged to.

It can be tricky figuring out what you can or cannot claim for, and this is where our guide comes into play.

We'll run through the different expenses you can claim for, but bear in mind that this isn't a definitive guide. Do check out our resource hub on limited company tax topics for more information, or consult our specialist accountants at Forma if you need personalised advice.

Allowable business expenses are essential costs that aren't taxable.

These expenses can be deducted against your income, thereby reducing the amount of tax that you need to pay. For example, if your revenue is £35,000 and your allowable expenses total at £5,000, you'll just be taxed on £30,000.

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 goes above the NIC threshold, you're required to pay NICs. 

Staff expenses

1. Annual staff party

You can claim for the costs of hosting an annual staff party, as long as the following conditions apply: 

• Your cost per pax shouldn't exceed £150 (including VAT). Your employees may invite a partner, and 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. 

Do note that the per pax budget of £150 applies across the year, so you can claim for several staff events as long as the costs fall within the budget. 

2. Gifts and trivial benefits

You're not required to pay tax and National Insurance contributions, nor notify HMRC about gifts or benefits for an employee if it meets the following conditions:

• It cost £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 the terms of their contract

You're required to pay tax on gifts and benefits that don't meet the above conditions. 

3. Healthcare expenses

If you provide private medical insurance for an employee, this is considered a benefit in kind. You're required to pay National Insurance contributions at 13.8% (2020/21 tax year), and your employee will pay personal tax. 

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

4. Childcare costs

As of 4th 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 £2000. The means that you'll receive £2000 per year for each child, for childcare costs of up to £10,000. Further information is available on the Gov.uk website. 

Pension contributions

After you've set up an agreement with a pension provider, you can make contributions into your own 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 of £40,000 (2020/21 tax year). 

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. 

Business entertainment

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

Business mileage

As a limited company director, you can claim back mileage from HMRC if you use your personal vehicle for business trips, and you've paid for the costs of fuel.

According to HMRC, these trips are defined as journeys you make 'wholly and exclusively' for business purposes. These include:

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

You can claim the following rates:

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

Business travel expenses

In general, you can claim for travel-related expenses as long as 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 for the following:

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

Use of home as office

1. Claiming a flat rate

If you use your home as an office, you can claim a rate of £4 per week as allowable business expenses.

HMRC doesn't require you to keep 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, can claim a proportion of household costs used by the business. The allowable expenses you can claim for will vary depending on the situation, but 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 that you work out the rooms that 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 you'll require lighting and heating for all of your hours spent on business activities. 

In order to claim proportional costs, a rental agreement must be established between you (the homeowner) and your limited company. The rules surrounding this 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 and other consumable office supplies.

Equipment

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

You can also claim for office furnishings like tables and chairs, as long as it is largely used for business purposes.

Plant and machinery

Starting 1 April 2021 until 31 March 2023, a 130 per cent super-deduction will apply. Companies purchasing qualifying plant and machinery assets will be able to claim a 130% super-deduction capital allowance, and a 50% first-year allowance for qualifying special rate assets.

These reliefs are only applicable to businesses subject to corporation tax (so it isn't available for sole traders, partnerships or limited liability partnerships. It also only applies to the purchase of new plant and machinery, and not second-hand assets.

Under the Annual Investment Allowance (AIA), you can claim tax relief on 100 percent relief of plant and machinery investments up to the threshold (currently £1 million, until 31 December 2021).

Further information is available on HMRC's factsheet.

Communications: Mobile phone, landline and broadband expenses

1. Mobile phone 

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

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

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

2. Landline

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

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 both 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 for 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.

Business insurance 

You can claim insurance policy costs, as long as you can prove that the policy is taken up strictly for business purposes.

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

Costs of forming your company

The costs that you incur for setting up 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.

Financial and legal expenses

1. Professional fees

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

2. Bank, credit card and other financial costs

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

3. Bad debts

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 the debts will not be recovered from your customer.

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

Professional development expenses

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

Training courses that 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 subscriptions 

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. 

Eye test expenses and glasses

You can claim for vision tests, only if you're required to use visual display equipment as part of your day-today 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.

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

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