Being a business owner in the UK means you have to understand how to navigate allowable expenses and how to reduce your taxable profit by making correct claims. 

This guide will serve as a clear and practical resource to help you identify eligible costs, avoid common mistakes and enhance your business’s tax efficiency by providing you with strategies on how to manage your business expenses.

What Counts as an Allowable Business Expense?

An allowable business cost is one which is necessary to earn your business income, including your employee wages, utility bills, office supplies, etc. These costs can be deducted from your business’s revenue to arrive at your actual taxable net income. This method effectively lowers the amount of tax your business has to pay.

This is different from a personal expense as personal costs are the ones incurred for yourself rather than to run your business.

A common area of confusion comes with mixed-up expenses, such as mobile phone contracts or a car used for both personal and business trips. In such a case, you can only claim the business portion for it by using apportionment method, like mileage logs for vehicles. 

Core Categories of Allowable Expenses

It is crucial for a business owner to identify what qualifies as an allowable expense to claim legitimate costs. For this reason, we have given a break-down below of all the allowable business expenses.  

Office and Administrative Costs

Office and administrative costs generally cover your everyday operational essentials. You can claim for office supplies like stationary and printing.

For communication, you can deduct the full cost of a dedicated business phone line or deduct only the business usage of a personal phone contract.

Similarly, a percentage of your broadband costs can be claimed based on work usage. Most essential software subscriptions, cloud services and accounting tools are categorised as fully allowable. 

Travel and Mileage

Costs incurred for journeys made for business purposes are fully claimable. This includes travelling done for business meetings, client visits and conferences. HMRC provides simplified Mileage Allowance Payments (45p per mile for cars, up to 10,000 miles, and 25p thereafter). Associated costs like parking tolls and necessary overnight accommodations are also included in this.

One of the exceptions is regular commuting from home to a permanent workplace, which does not come under allowable expense.

Staff Costs

If you are an employer, there are many allowable costs that come with this. Staff costs include salaries, wages, bonuses and employer’s National Insurance Contributions (NIC). 

Employer pension contributions,relevant training courses and professional development (CPD) are also deductible. 

Other allowable expenses also include the fees paid to freelancers, subcontractors and agency staff that you may hire for your business. 

Marketing and Advertising

Any costs incurred to promote your business are deductibles. This can be website development, hosting, maintenance fees, and online advertising (Google Ads & Social Media Promotions). 

Other traditional marketing costs such as print brochures, business cards, and costs of attending networking events purely for marketing purposes can also be deducted as allowed expenses. 

Professional and Financial Costs

Professional and Financial costs include accounting and bookkeeping fees, legal advice for your business related matters, and other professional consultancy fees.

Some insurance policies such as employee liability insurance, Professional Indemnity Insurance and public Liability Insurance are claimable expenses as long as they meet HMRC’s insurance regulations.

If you have taken out a business loan for the purpose of growing your business, the interest charged on that loan is usually deductible. 

Equipment and Capital Allowances

For many expensive assets like equipment, machinery and business vehicles, you usually can’t claim the full cost of such items as an immediate expense. Instead, HMRC treats them as long-term assets, and lets you deduct a portion or all the asset’s value from your profits each year through Capital Allowances.

Using the Annual Investment Allowance (AIbA) rule of Capital Allowance, you can deduct the full cost of these assets right away from your profit as long as these are being used for business purposes and the total purchase value is under £1 million a year.

Working from Home Expenses

If you work from home, HMRC lets you claim a portion of the household costs that are being used for your business, like electricity and internet bills.

You can use two ways to claim these expenses:

• HMRC Flat Rate: You can claim a fixed, simplified tax-free amount every month (£10 per month for 25-50 hours of work, £18 for 51-100 hours, and £26 for 101+ hours).
• Apportionment Method: You can calculate the business percentage of actual costs like heating, electricity, internet, and council tax based on the area and time used for work.

Vehicle and Transport Costs

For business uses of a transport vehicle, you can choose between HMRC simplified mileage rates or fuel apportionment.

Using the Flat Rate or simplified mileage rate, you can claim 45p on the first 10,000 miles, 25p after 10,000 miles, for cars and goods vehicles and 24p for motorcycles. 

If you have already claimed capital expense on a business vehicle, HMRC does not allow you to claim simplified expenses for such a vehicle. 

You can use fuel apportionment to calculate the actual business proportion of costs (fuel, insurance, repairs & road tax)., if you own a car used for both business and personal use. In such cases, it is crucial to keep meticulous records to separate personal and business use.

Other Allowable Expenses

Subscriptions like membership fees for recognised personal bodies is a claimable expense. You can also claim the cost of annual events and staff entertainment activities like office Christmas parties as long as the cost is £150 or less per head. Some limited companies can also claim the cost of qualifying charitable donations made by the company.

Expenses You Cannot Claim

You cannot claim expenses that are personal and not used for your business. Some of the non-allowable expenses are mentioned below:

• Client Hospitality: Any cost that incurs for the purpose of client or hospitality entertainment, such as taking a client out for a meal or an event.
• Fines and Penalties: If you have faced any fines and penalties like parking tickets or late fees filing, HMRC does not allow you to claim these.
• Everyday Clothing: The cost of non-specialist, everyday clothing is considered a personal expense. Even if you buy a suit for an office meeting, it will be considered a non-allowable expense.
• Personal Drawings: If you are using money from your business account, for personal use, it is non-deductible .
• Personal Expenses: Your income tax payments and personal life or health insurance premiums, are all considered disallowable expenses. 

Record-Keeping and Compliance Requirements

Keeping accurate records of all your business and personal expenses is a legal requirement in the UK. Under the new Making Tax Digital (MTD), most businesses are now required to keep digital records of income and expenses.

These records must be retained for at least 5 years after the relevant tax submission deadline. It is highly recommended to use dedicated accounting software, as it helps to streamline this process and reduce any errors.

When to Seek Professional Advice

While many expenses are straightforward, professional advice is invaluable in complex scenarios. This may include navigating complex capital allowance claims for assets or understanding the tax implications of mixed-up assets like a property used as both home and office.

As your business grows, an accountant is essential to ensure compliance and optimal structure. But most importantly, accountants provide you with essential support and expert advice if you face HMRC enquiry or compliance review, and help you to resolve matters efficiently and protect your business’s financial health. 

Conclusion and Call to Action

If you want support, managing your business expenses accurately and efficiently, book a consultation with Heighten Accountants. Heighten provides expert advice and ensures you claim everything you are entitled to, while avoiding costly compliance errors, so you can focus your energy on growing your business with confidence.