Allowable expenses – What are allowable expenses?
Allowable expenses are essential business costs that are not taxable.
Allowable expenses aren’t considered part of a company’s taxable profits. You therefore don't pay tax on these expenses. For example, a company has an annual turnover of £15,000. They spend £2,000 on allowable expenses. They only pay tax on the remaining £13,000.
Most small businesses can claim allowable expenses, but there are a few exceptions. You can’t claim allowable expenses if you use the £1,000 tax-free ‘trading allowance’, and separate rules apply to limited companies.
Only certain costs can be claimed as allowable expenses, including:
Office costs such as stationary, phone bills or other items that you use for less than two years
Costs of business premises such as utility bills and rent (costs associated with buying property aren’t considered allowable expenses)
Travel costs such as fuel, parking or train tickets (travel to and from work isn’t an allowable expense)
Staff costs such as wages, salaries, bonuses and pensions
Clothing costs such as uniforms or protective clothing (everyday clothing that you wear to work isn’t an allowable expense)
Legal and financial costs such as credit card charges, overdraft fees, insurance policies or hiring the services of accountants, bookkeepers, solicitors or surveyors (you can’t claim legal fines)
Advertising and marketing costs such as printed adverts and the cost of building a website
Items that you only buy to sell on such as raw materials or merchandise
When claiming allowable expenses, it’s important to distinguish between business costs and personal expenses as you can’t claim private purchases as allowable expenses.
If you use money from your company to pay for a personal expense, you shouldn’t include the cost when calculating your annual allowable expenses.
For small businesses and freelancers, it’s common to have expenses that cover both business and personal costs. Under these circumstances, only the business costs can be claimed as allowable expenses.
For example, you use your car to drive to meetings with clients, but you also use it to get around outside of work. You spend £200 a month on petrol. You calculate that you use 25% of the petrol during work-related trips (not including journeys between home and work). You can therefore only claim £50 a month as an allowable expense for fuel.
You can claim allowable expenses through your annual Self Assessment tax return. You don’t need to submit proof of your expenses when you submit your tax return, however, you may be asked by HMRC to show evidence of your costs. It’s therefore important to keep complete, accurate records of your expenses throughout the tax year.