Running a limited company as a contractor gives you access to a wider range of tax-deductible expenses than sole traders. Understanding what you can and can’t claim through your company reduces your corporation tax bill and keeps you on the right side of HMRC.
How Ltd Company Expenses Work
When your company pays for a legitimate business expense, it reduces the company’s taxable profit. At the current 25% corporation tax rate, every £100 of allowable expenses saves you £25 in tax.
The expense must be wholly and exclusively for business purposes. Mixed-use items (like a personal phone used for work) can only be claimed for the business proportion.
Travel and Subsistence
Travel is typically the largest expense category for contractors.
Client Site Travel
You can claim travel to client sites that are temporary workplaces — meaning you expect to be there for less than 24 months:
| Expense | How to Claim |
|---|---|
| Car mileage | 45p/mile for first 10,000 miles, 25p after (HMRC approved rates) |
| Train tickets | Full cost including first class if reasonable for the journey |
| Flights | Domestic and international for client work |
| Parking | At client premises or station |
| Congestion charge / tolls | When travelling to client sites |
| Taxis | When public transport isn’t practical |
The 24-Month Rule
This is the most important rule for contractor travel. You can claim travel expenses only while your engagement at a single location is expected to last under 24 months.
Key points:
- The clock starts from your first day at the site
- It’s based on your expectation at any given time, not what actually happens
- If a 6-month contract is extended repeatedly and you expect to pass 24 months, stop claiming from the point of that expectation
- Breaks of more than 40% of the total period can reset the clock
- Different sites for the same client count separately
Subsistence (Food and Drink)
When working away from home at a temporary workplace:
| Expense | Allowable? |
|---|---|
| Breakfast (early start away from home) | Yes — up to £5 reasonable |
| Lunch (at client site) | Only if away from normal work location and additional cost incurred |
| Evening meal (overnight stay) | Yes — reasonable cost |
| Hotel/accommodation | Yes — for temporary workplace overnight stays |
| Meals at home or regular workplace | No |
Equipment and Technology
Computer Equipment
| Item | Treatment |
|---|---|
| Laptop/desktop (business only) | Full deduction as company expense |
| Monitor, keyboard, peripherals | Full deduction |
| Software licences | Full deduction (or amortised if multi-year) |
| Cloud subscriptions (Microsoft 365, etc.) | Full deduction |
| Mobile phone (company contract) | Full deduction including calls — no benefit in kind if one phone provided |
The Annual Investment Allowance
Equipment costing over £1,000 may need to be capitalised, but the Annual Investment Allowance (AIA) lets you deduct 100% of qualifying capital expenditure in the year of purchase, up to £1 million per year. In practice, this means almost all contractor equipment purchases are fully deductible immediately.
Personal Use
If equipment is used partly for personal purposes, only the business proportion is deductible. HMRC accepts reasonable apportionments — 80% business for a laptop used occasionally for personal tasks is common.
Home Office Costs
If you work from home (even occasionally), your company can pay you for use of your home:
Option 1 — Flat Rate (Simplest)
HMRC allows a flat rate without receipts:
| Hours Worked From Home Per Month | Monthly Amount |
|---|---|
| 25–50 hours | £10 |
| 51–100 hours | £18 |
| 101+ hours | £26 |
Option 2 — Proportion of Actual Costs
Calculate the business proportion of:
- Heating and electricity
- Council tax
- Mortgage interest or rent
- Water rates
- Home insurance
- Broadband
Method: Divide by the number of rooms in your house, then by the proportion of time used for business. For example, one room of a four-room house used 60% of the time for business: 1/4 × 60% = 15% of household costs.
Important — No Capital Gains Risk
If your company pays you a reasonable amount for home use, this won’t create a capital gains tax liability when you sell your home — provided no part of the house is used exclusively for business.
Professional and Insurance Costs
| Expense | Deductible? |
|---|---|
| Accountant fees | Yes — typically £1,200–£2,000/year |
| Professional indemnity insurance | Yes |
| Public liability insurance | Yes |
| Employer’s liability insurance | Yes (required if you hire anyone) |
| Professional body subscriptions (ACCA, BCS, etc.) | Yes |
| IR35 contract reviews | Yes |
| Legal costs (contract disputes, company matters) | Yes (business-related) |
Training and Development
| Type | Deductible? |
|---|---|
| Training related to current role | Yes — courses, conferences, books |
| Professional certifications | Yes — if relevant to current work |
| Training for a completely new role/career | No — not “wholly and exclusively” for current business |
| General business books/resources | Yes |
What You Cannot Claim
These are commonly attempted but not allowable:
| Expense | Why Not |
|---|---|
| Client entertainment (meals out, gifts) | Specifically disallowed by HMRC for corporation tax |
| Clothing (suits, general workwear) | Not specialist — could be worn outside work |
| Speeding fines or parking tickets | Penalties are never deductible |
| Travel to permanent workplace | Home-to-permanent-office commute is not business travel |
| Non-business use of company assets | Creates a benefit in kind (taxable on you personally) |
| Dividends or salary | These are distributions, not business expenses |
Benefits in Kind — Watch Out
If your company provides you with personal benefits, these are taxable as benefits in kind (BiK) and reported on form P11D:
- Company car — taxed based on CO2 emissions and list price (can be very expensive)
- Private medical insurance — taxable on the employee but the company gets corporation tax relief
- Gym memberships — taxable benefit unless available to all employees
- Loans from the company over £10,000 — taxable on the beneficial interest rate
Tax-Free Benefits
Some things the company can provide without a tax charge:
- One mobile phone (company contract)
- Annual staff party up to £150 per head
- Trivial benefits up to £50 per occasion (£300 annual cap for directors)
- Workplace parking
- Eye tests and corrective glasses for VDU use
- Employer pension contributions (no annual limit for corporation tax relief, though the employee’s annual allowance applies)
Keeping Records
HMRC requires you to keep records for 6 years from the end of the accounting period. For every expense:
- Keep the receipt or invoice
- Record the date, amount, and business purpose
- Photograph receipts (paper fades) — apps like Dext or FreeAgent automate this
- Maintain a mileage log if claiming car travel
Your accountant will typically handle the categorisation, but you’re responsible for providing complete and accurate source documents.
Salary, Dividends, and Expenses — The Order
The tax-efficient extraction strategy for most contractors:
- Claim all legitimate expenses through the company first (reduces corporation tax)
- Pay yourself a salary at the optimal level (typically £12,570 to use the Personal Allowance)
- Make employer pension contributions (tax-free way to extract up to £60,000/year)
- Pay dividends from remaining profits (taxed at lower dividend rates)
Getting expenses right is the foundation — every missed expense means paying 25% more corporation tax than necessary.