If you’re a limited company contractor, you can offset a wide range of expenses against your company’s profits – reducing its Corporation Tax liability.
Here we look at some of the typical expenses you will incur as a contractor and how they are treated for tax purposes.
Contractor expenses – the basics
The golden rule is that you can only claim business expenses incurred wholly and exclusively while carrying out your trade.
You may pay for these costs out of your own pocket – and reclaim them from your company, or the company may pay for them directly.
It doesn’t matter how they were paid for as long as they are genuine business costs.
There are many ‘grey areas’ – for example, if you claim for something that has a ‘dual-purpose’ (personal and business use).
You should always check with your accountant if you are unsure about the validity of your expense claims.
Here are some typical tax-deductible expenses your company can typically offset its Corporation Tax liability.
Typical contractor expenses
Professional fees
Such as accountancy fees or the costs of using a solicitor for business purposes.
Salaries
Any wages paid to directors and other employees. This is often a company’s biggest single annual expense.
National Insurance
Your company pays any Employers’ National Insurance on salaries above the current threshold.
Business Insurance
This includes professional indemnity, business liability and tax investigation cover. Find out more about contractor insurance.
Computing equipment
The tax treatment of PCs, laptops and other equipment is accounted for via a system of capital allowances.
Computer software
Most contractors incur costs on anything from Office 365 and Norton Antivirus to software specific to your skillset.
Telephones, Broadband
Mobile and internet costs – if the contracts are in the company name. You can also claim business phone calls if they are itemised on a personal bill, although this is less commonplace nowadays with inclusive minutes.
Mileage
If you use your own car for business, you can claim 45p/mile for the first 10,000 miles (and 25p thereafter). Find out more about mileage expenses and be aware of the 24-month rule.
Other travel costs
You can reclaim the cost of parking, all other types of transport, and any congestion charge fees.
Pension contributions
Executive pension contributions represent a popular tax-deductible expense.
Relevant Life Insurance
You can pay for life insurance via your company, as long as it’s a relevant life policy – saving up to 50% compared to a traditional life cover policy purchased out of post-tax income.
Income Protection
Executive income protection premiums are allowable. This type of insurance pays out if a director is unable to work due to illness or injury.
Professional magazines
Subscriptions to magazines and periodicals if strictly related to your business.
Subscriptions to professional organisations
Allowable as long as the organisation appears on HMRC’s prescribed list.
Entertainment
The cost of entertaining clients is not an allowable expense. The company can still foot the bill, but won’t be able to offset the costs against Corporation Tax. One small exception is the tax treatment of an annual staff event (below).
Stationery
The costs of postage, stationery, printing, business cards, etc.
Website costs
The costs relating to setting up and running a business website, including web hosting, email and domain names.
Training
Training courses are allowable if they are directly related to your contract work.
Accommodation
Such as hotels and guest houses – as long as you work away from your permanent residential address.
Relocation
Relocation, including removal expenses – subject to certain conditions.
Subsistence
As long as you are not working at a temporary workplace for 24 months or more.
Finance charges
Including business banking monthly fees. You can also claim for the cost of interest on loans and overdrafts.
Eye test
You can claim for an annual eye test if you use computer equipment!
Medical check-up
The cost of an annual check-up with BUPA, etc.
Working from home
You can claim a flat £6/week allowance for your home office – and receipts are unnecessary. Alternatively, you can claim for a proportion of certain household expenses – but only when you can validly allocate the business element. Find out more here.
Work clothes
There is limited scope for claiming work clothing expenses. If you need to buy protective clothing purely for work, this may be allowable. Standard ‘everyday’ clothes don’t count.
Annual company staff event
Claim up to £150 per eligible person for an annual company event (e.g. a Christmas party).
IR35 and the 5% allowance
Historically, if your contract work was caught by IR35, HMRC granted companies a fixed 5% allowance to cover the administration expenses associated with running a business.
However, following the introduction of the ‘Off Payroll’ rules in April 2017 (public sector) and April 2021 (private sector), this allowance has been scrapped for most contractors – with one notable exception.
If you work for a ‘small company’ client, you can still claim the 5% allowance if your contract work is caught by IR35.
This allowance is a flat rate deduction of 5% of the gross fees receivable for any relevant contracts.
You can learn more about the ‘5% allowance’ in our dedicated article, IR35 deemed payment and the treatment of expenses.
Final considerations
Always ensure that any expenses you claim are genuine and were incurred solely for business purposes, and keep receipts for any expenses you claim.
If you’re in any doubt, ask your accountant for advice.
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