Allowable business expenses for limited company directors: What you can claim and HMRC rules explained

Business expenses are costs a limited company incurs that can be reclaimed from its income, thereby reducing its taxable profit. This in turn lowers the amount of Corporation Tax your company must pay. However, expenses are only allowable if they’re wholly, exclusively and necessary purchased for business purposes.

It can be difficult to understand what’s allowable and what isn’t. If you get it wrong, you may be subject to fines from HMRC, but if you don’t claim at all you could be walking away from potential savings.

In this guide we explore the types of expenses you’re able to claim, how you’re able to tell if it’s allowable or not, and answer the most common questions our Client Directors get asked by their clients.

• Expenses must be wholly, exclusively, and necessary for business purposes to be allowable 

• You must maintain proper records to prove your expenses are legitimate to HMRC 

• Separate your business expenses from your personal ones by using a business bank account  

• Always speak to your Aardvark Client Director if you’re not 100% sure an expense is allowable  

Travel expenses are probably the most common business expense for limited company directors. Whilst this may be the case, not everything is allowable.

Commuting

Many believe that commuting to a regular place of work is an allowable business expense, which is not the case.

HMRC will only allow travel as a business expense if it’s to a temporary workplace, which you do not expect to work at for more than a 2-year period. It’s important to also understand that if you spend 40% or more of your working time at a workplace, and you expect that to continue for more than 24 months, HMRC considers that location a permanent workplace.

Should your travel expenses be allowable, you’re able to claim for the following:

• Mileage in your personal vehicle – 55p per mile for the first 10,000 miles per tax year, then 25p thereafter

• Public transport fees (air travel, taxi, tube, train)

• Congestion charges, tolls and parking costs

Subsistence expenses

You’re also able to claim the cost for the following when travelling for business:

• Meals

• Hotel stays or other reasonable accommodation

• Incidental overnight expenses such as laundry costs or newspapers (up to £5 per night in the UK, or £10 outside of the UK, and it must all be receipted)

HMRC will need to have proof of these expenses, to ensure they are wholly for business purposes. You’ll need to keep detailed records of your travel, mileage logs and receipts to do so.

Home expenses 

If you work from home, you’re able to claim a portion of your household running costs as a business expense. There are two ways to do this: 

1. Flat Rate Allowance – You’re able to claim £6 per week without the need to provide receipts 
2. Detailed calculation – If you work from home for a large period, you may be able to claim a higher amount than the Flat Rate Allowance. You’re able to do so by calculating the portion of your household bills (like heating and electricity) that’s used for business purposes 

Your Aardvark Client Director is always on hand to help answer your questions and help you decide which option is right for you. You can also read our other blog on home expenses to understand in greater detail which option is best for you.  

Internet and broadband 

• If you have a dedicated business broadband line in your company’s name which your company pays for, then it’s an allowable expense 

Mobile phones 

• If using your personal mobile phone, you’re able to only claim for the cost of business calls 

• When purchasing a new phone, consider putting the whole contract in your company’s name, as the whole cost may be allowable 

•  Companies can provide one tax-free mobile phone per employee 

Professional services 

Fees paid to accountants, solicitors and business advisers are allowable when the fees relate to the company. For example, some allowable expenses can include: 

• Accountancy fees 

• Bookkeeping 

• Tax advice 

• Contract reviews 

• Legal advice on your business’ activities  

Certain legal advice (for personal matters or the purchase of fixed assets, such as property) are not considered allowable business expenses.  

Training and development 

Training costs must either enhance or update a skill you already use in your profession, in order to be classed as an allowable training cost. For example if you were a programmer and were learning a new coding language this would be allowable, whereas if you were to retrain as a teacher this would not.

The expenses incurred in the entertainment of staff, clients, trivial benefits, gifts and charitable donations all carry their own rules, depending on who they benefit. 

Trivial Benefits 

You’re able to give small gifts or perks to your employees without triggering a tax charge per tax year. This could be a bottle of wine or a bouquet of flowers to make a special occasion. The rules surrounding Trivial Benefits include that: 

• Each item must not cost more than £50 (including VAT) 

• Gifts cannot be in cash or a cash voucher 

• Director’s annual limit is £300 in total 

For more information, read our trivial benefits blog. 

Staff entertaining 

You’re able to claim the cost of annual staff events, up to the value of £150 per person (including VAT), per personal tax year Event examples include Christmas parties, summer BBQs, etc.  

Allowable events must: 

• Not cost more than £150 per person, per year. If this limit is exceeded, the entire amount is therefore disallowable 

• Be open to all staff, and not just your company’s directors 

Client entertaining 

Client entertainment costs, such as meals, drinks, events, etc, are claimable through your limited company, but they are not tax-deductible (meaning you’re not able to claim back Corporation Tax or VAT).  

Charitable donations 

You’re able to make donations to registered charities, so long as they do not cause a loss to your company.  

You are not allowed to make donations to political parties or non-registered charities.  

Making sure your business is protected from risk and prepared for the future is all part of running a successful company. Most insurance and pension costs they are tax-deductible, but some do carry additional tax implications which you need to be aware of. 

Business insurance 

The following examples are commonly used by limited companies, and are considered allowable business expenses: 

• Employer’s Liability Insurance (which, by law, every limited company must have) 

• Public Liability Insurance 

• Professional Indemnity Insurance (which agencies often require) 

If you choose to pay for private medical / dental insurance through your company, this will traditionally trigger a Benefit in Kind (BiK) charge and must be reported on your P11D. This could also result in additional tax for both the employee or director, and the company too. 

You can read more about business insurance cover here. 

Relevant life cover 

Is a tax-efficient life insurance policy that’s set up by the company to pay out a lump sum if the insured employee or director passes away (or is diagnosed with a terminal illness): 

• The company pays the premiums 

• Payouts are free from Income Tax, Corporation Tax, and National Insurance 

Executive income protection 

Is an insurance policy which pays a director or employee a monthly benefit if they’re unable to work due to illness or injury.  

It provides financial stability to the business and is usually treated as an allowable business expense.  

Pension contributions are classed as allowable business expenses when made by the company on behalf of its directors and employees. Please note, if the contributions cause the company to go into a loss-making scenario, these may be disallowed.    

There are annual limits, so it’s worth speaking to a financial adviser for greater clarification on your pension. 

Read our blog on pension contributions for a more detailed look at how they work. 

Everyday business costs can be considered allowable expenses. Those which fall into the categories of marketing, technology, and general office spend, can be used to reduce your taxable profit.  

Marketing and advertising 

Those allowable costs include: 

• Business cards 

• Website design, hosting and maintenance 

• Social media adverts 

• Promotional materials 

• Online or print advertising 

You can also claim for sponsorship, but only if you’re able to prove that it provides a clear benefit to your business (such as sponsoring a local sports team in exchange for them printing your company’s logo onto their kit).  

Computer equipment and software 

• The cost of computers, laptops, tablets, and related equipment is all allowable, but only if personal use is only incidental 

• Software licences and subscriptions that are necessary for your work may also be claimed 

If you are VAT registered you will be able to claim back the VAT on these costs, but it’s important to remember that if you’re using the Flat Rate VAT Scheme for VAT, you’re only able to reclaim the VAT element if the purchase is £2,000 or more (which applies to computer equipment and other capital assets). Your Client Director will be able to confirm whether this applies to you or not. 

Other common allowable expenses 

• Subcontractor or freelancer costs 

• Trade-related books, journals, or magazines 

• Postage, stationery, and printing costs 

• Certain professional subscriptions and memberships 

It’s important to ensure the expense has a clear business purpose. If it’s clear that there has been significant personal use or there’s no direct link to your company’s activity, it’s likely that HMRC will disallow the claim.  

Whilst it might seem like every expense through your company qualifies as allowable, that’s not always the case. HMRC’s rules surrounding allowable expenses are strict, and claiming the wrong items can lead to rejected claims, additional tax, or penalties. Some of the most common examples of disallowable expenses include: 

Personal lifestyle costs 

• Personal holidays and personal subscriptions (e.g. Netflix, Spotify). These are never allowable 

Clothing 

• Everyday clothing, including suits, shoes, or general office wear, cannot be claimed 

• However, specialist clothing such as uniforms, protective gear, or costumes required for your role are allowable 

Fines and penalties 

• You are not allowed to claim for speeding tickets, parking fines, or any other penalty, even if they were incurred during travel for work. HMRC will view these costs as preventable and your own personal responsibility, and not that of your company. 

Home improvements 

• Even if you work from home, any renovations or upgrades to your home are not allowable, unless you’re able to prove that the costs are exclusively and wholly for business and provide no personal benefit 

If you’re unsure, ask yourself: ‘Would I still incur this cost if I wasn’t running my business?’. If the answer is yes, then it’s highly likely to be disallowable.  

Correctly claiming all your allowable expenses is one of the biggest impacts you can have on your tax bill. 

Corporation tax savings 

By ensuring you’re claiming every genuine business cost, you’re reducing your overall company’s taxable profit, which therefore reduces the amount of Corporation Tax you’ll owe. 

Reimbursed expenses 

If you pay for expenses personally from time to time (such as travel or subsistence), you’re able to reimburse yourself tax-free, so long as the expense is 100% valid and you properly record it.  

Reimbursed expenses don’t carry any additional Income Tax or National Insurance charges, as they are not treated in the same way as extra salary or dividends are. 

VAT reclaims 

If your company is VAT registered and you have a valid VAT invoice, you’re often able to reclaim VAT on business purchases. 

To be able to legitimately claim for your business expenses, you must have the correct documentation, and without it HMRC can reject your claims (even if it was an allowable expense). To ensure you keep all records correctly, we advise you to: 

• Use accountancy software to consistently log expenses 

• Digitally store backups of all receipts 

• Track your mileage with an app or log and ensure they include dates, destinations, and the purpose for your travel 

• Keep all records for a minimum of 6 years, should HMRC ask to see them 

• Make sure you set yourself alerts for your business’ VAT returns, Corporation Tax and annual accounts deadlines 

• Accidentally mixing your professional and personal finances by using the same bank account for both 

• Claiming personal costs as business expenses, such as holidays, clothes, streaming services, etc 

• Not claiming all legitimate expenses, such as working from home or pension contributions 

• Failing to keep up-to-date records, losing receipts or forgetting to log all your expenses 

• Misclassifying costs for training or entertainment 

• Failing to set aside enough money to cover your tax obligations, which will lead to future cashflow problems 

By ensuring you’re in a regular routine of logging all your expenses either weekly or monthly, you’ll prevent mistakes and missed claims. You’ll be thankful for your consistently when it comes to year-end! 

Running a limited company can carry its complexities, and that’s where your Aardvark Client Director comes in. They’re here to help you understand expenses and maximise allowable expenses while keeping you fully compliant.

Speak to your Client Director for tailored advice on business expenses and tax planning, or, if you’re not yet an Aardvark client, get in touch to learn more.