Tax year: 2026/27 | Last reviewed: 2 October 2026
Every allowable expense reduces your company’s taxable profits. At corporation tax rates of 19% to 26.5% in the marginal band, a £1,000 expense saves £190 to £265 of tax, and paying for genuine business costs through the company avoids paying them from personally taxed income. The test is that the cost is incurred wholly and exclusively for the purposes of the trade.
People costs
- Salaries, bonuses and employer NI
- Director salary, see best director salary 2026/27
- Employer pension contributions, often the most tax-efficient extraction route
- Staff training and professional subscriptions to approved bodies
- Annual staff events up to £150 per head. See entertaining rules
- Staff benefits such as health cover and relevant life insurance
- Subcontractor and freelancer costs
Premises and home working
- Rent, business rates, utilities and insurance for business premises
- Repairs and maintenance
- £6 a week homeworking allowance or proven additional costs. See use of home as office
Travel and vehicles
- Business mileage in your own car at 55p a mile. See mileage allowance
- Train, taxi, parking and tolls for business journeys
- Hotels and subsistence on business trips
- Company vans and their running costs
- Company cars, with tax relief through capital allowances or lease payments. See electric company cars
Equipment and capital items
Computers, machinery, tools and furniture are capital items, but the Annual Investment Allowance gives 100% relief on up to £1 million a year. Companies can also use full expensing for new plant. Most small companies get full relief in the year of purchase.
Running the business
- Software subscriptions, including Xero, Dext and payroll
- Phone and broadband
- Accountancy, legal and professional fees
- Bank charges, card fees and interest on business loans
- Advertising, websites and marketing
- Business insurance
- Companies House fees. See Companies House fees 2026
- Charitable donations
Worked example: what expenses are worth
A design company has profits of £80,000 before tax. During the year it pays £4,000 for a new laptop and monitors, £1,800 of software subscriptions, £2,200 of business mileage to the director and £12,000 of employer pension contributions. Those £20,000 of costs reduce profits to £60,000.
- Corporation tax on £80,000: £17,450
- Corporation tax on £60,000: £12,150
- Tax saved: £5,300, an effective 26.5% because the profits sit in the marginal relief band
Had the director paid for the laptop, software and travel personally out of dividends, they would have needed roughly £12,500 of dividends to fund the £8,000, at a dividend tax cost of around £4,500 for a higher rate taxpayer.
VAT on expenses
If the company is VAT registered, it can usually reclaim the VAT on business expenses, provided it holds a valid VAT invoice. VAT cannot be reclaimed on client entertaining, on most car purchases, or on the private-use share of costs. On the Flat Rate Scheme, VAT is generally not reclaimable except on capital items over £2,000. Read about the Flat Rate Scheme.
Capital allowances in more detail
- Annual Investment Allowance: 100% relief on up to £1 million a year of plant and machinery, including equipment, vans and fixtures, but not cars.
- Full expensing: unlimited 100% relief for companies on new main rate plant and machinery.
- 40% first year allowance: from 1 January 2026 for new plant, including assets bought for leasing.
- Cars: new electric cars get 100% until 31 March 2027. Other cars go into the main pool at 14% (from April 2026) or the special rate pool at 6%.
- Buildings: the Structures and Buildings Allowance gives 3% a year on qualifying construction and renovation of commercial buildings.
Director expenses: how to claim
- Pay for the item personally or on a company card.
- Upload the receipt to Dext, or record it in Xero expenses, the same day.
- For mileage, keep a log with date, route, purpose and miles.
- Reimburse yourself from the company bank account monthly, with a reference such as “Expenses March”.
Routing expenses through the director’s loan account is fine as long as the balance stays in credit. Our Xero bookkeeping service handles this for you.
Grey areas we are often asked about
- Clothing: only protective clothing, uniforms or costumes for performers. A suit for meetings is not allowable.
- Gym membership: taxable benefit for the director, though deductible for the company.
- Christmas gifts for clients: deductible only if under £50 per person per year, carry a clear business advertisement and are not food, drink or tobacco.
- Childcare: not deductible, but Tax-Free Childcare may help personally.
- Medical insurance: deductible but taxable as a benefit for the employee.
What is not allowable
- Client entertaining, except small branded gifts
- Personal expenses such as clothing that is not protective or branded uniform
- Ordinary commuting to a permanent workplace
- Fines and penalties, including parking fines incurred by directors
- Dividends, which are paid from post-tax profits
- Depreciation, which is replaced by capital allowances
- Corporation tax itself
Personal costs paid by the company
If the company pays a director’s personal bill, it is either a benefit in kind, salary, or a loan to the director. An overdrawn director’s loan account over £10,000 creates a benefit, and loans outstanding nine months after the year end trigger a 33.75% s455 charge. Keep personal spending separate.
Sole traders
The rules for the self-employed are similar but not identical. See what expenses a sole trader can claim.
FAQs
Can my company pay for my phone?
Yes. One mobile phone with the contract in the company’s name is a tax-free benefit.
Do I need receipts?
Yes. Keep digital copies of invoices and receipts for at least six years. Dext makes this effortless.
Talk it through with Digivolve
We review your expense coding as part of the year end, so nothing allowable is missed and nothing risky slips through.
This article is general information based on the rules for the 2026/27 tax year as at October 2026. It is not personal tax advice. Rates and thresholds can change, so please speak to us before acting.