If you run your contracting through a limited company, every legitimate expense you record cuts your Corporation Tax bill and leaves more money in the business. Miss a claim and you've quietly overpaid. Claim something you shouldn't and you've handed HMRC a reason to ask questions.
So the goal is simple: claim everything you're genuinely entitled to, and nothing you're not.
This guide is the practical list we'd give a new contractor client. It covers what counts as an allowable expense, the one test that decides almost every borderline case, the costs contractors most often forget, and the ones that get rejected. We've included an illustrative worked example so you can see how the numbers actually land.
It's written for limited company contractors and consultants. If you're inside IR35 or working through an umbrella, the rules are tighter, and we flag that as we go.
What counts as an allowable contractor expense?
An allowable expense is a cost your company incurs to run the business. When it's allowable, the company deducts it from its profits before working out Corporation Tax, so it reduces the tax due.
The Corporation Tax small profits rate is 19% for profits up to £50,000 for the financial year starting 1 April 2025 (FY2025), per gov.uk. In rough terms, that means a £100 allowable expense saves the company about £19 in tax. The expense still costs the company money, so this is about reducing tax on money you'd have spent anyway, not "getting things for free".
Two things matter for every expense:
- The cost must meet HMRC's test (covered next).
- You must keep the evidence. Keep receipts, invoices and mileage logs, normally for at least six years from the end of the accounting period, in line with HMRC's record-keeping guidance.
The wholly and exclusively test, explained
Almost every expense decision comes down to one rule. A business cost is allowable for the company if it's incurred wholly and exclusively for the purposes of the trade.
The phrase does a lot of work. "Wholly and exclusively" means the cost has to be there for the business and only the business. If a cost has a mixed business and personal purpose (what HMRC calls a "duality of purpose"), it usually fails.
Here's the distinction in practice:
- A laptop you buy only for client work passes. It's wholly and exclusively for the business.
- A suit you'd happily wear to a wedding fails, even if you also wear it to client meetings. Everyday clothing has a personal purpose built in.
There's a useful exception. Where a cost can be split cleanly into a business part and a personal part, you can claim the business part. Your mobile phone is the classic case: put the contract in the company name and the business use is allowable. A reasonable apportionment of a genuinely mixed cost is fine, as long as you can justify the split.
If you can't separate the business element, or the personal benefit is more than incidental, leave it out.
What's the full list of expenses a contractor can claim?
Below are the cost categories most limited company contractors will use. The general gov.uk guide to business expenses sets out the main headings; the specifics for a contractor company are below.
| Category | Typical claims | Watch out for |
|---|---|---|
| Salary and pension | Director's salary, employer pension contributions | Salary must be processed through PAYE |
| Accountancy and professional fees | Accountant, bookkeeping, certain legal fees | Personal tax return prep isn't a company cost |
| Business travel | Mileage, train and bus fares, parking, congestion charge | Not home-to-permanent-workplace commuting |
| Accommodation and subsistence | Hotel and reasonable meals when working away | Subject to the 24-month rule |
| Equipment | Laptop, monitor, phone handset, tools | Capital items have their own relief (see below) |
| Software and subscriptions | Industry software, cloud tools, professional bodies on HMRC's approved list | Personal-use software fails |
| Phone and internet | Business mobile in the company name | Personal landline usually fails the duality test |
| Home-working costs | Flat-rate use-of-home, or a fair share of bills | See the home-working section |
| Insurance | Professional indemnity, public liability | Personal cover isn't allowable |
| Marketing | Website, business cards, advertising | Not client entertainment |
| Training | Courses that update skills for your current trade | New, unrelated skills can be challenged |
| Bank and finance charges | Business account fees, interest on business borrowing | Personal account charges fail |
A few of these deserve more detail.
How are equipment and bigger purchases treated?
Day-to-day costs are deducted in the year you incur them. Larger, longer-lasting items, such as a laptop or specialist equipment, are "capital" purchases and get relief through capital allowances instead.
For most companies, the Annual Investment Allowance lets you deduct the full cost of qualifying plant and machinery in the year of purchase, up to £1,000,000, per gov.uk. For a typical contractor buying a laptop and a monitor, that means you still get full relief in year one; it just sits in a different box on the tax return.
Which subscriptions and professional fees count?
Accountancy and bookkeeping fees for the company are allowable. So are subscriptions to professional bodies that appear on HMRC's approved list of approved professional organisations, where membership is relevant to your work. A subscription you'd hold anyway for personal interest doesn't qualify.
How do travel and the 24-month rule work?
Travel is where contractors lose the most money to errors, in both directions.
You can claim travel for genuine business journeys: visiting a client, travelling between work sites, or going to a temporary workplace. You can't claim ordinary commuting from home to a permanent workplace.
If you use your own car, you can claim the HMRC approved mileage rate rather than fuel and running costs. For 2025/26, the approved rates for cars and vans are 45p per mile for the first 10,000 business miles in the tax year, then 25p per mile after that, per gov.uk. Motorcycles are 24p per mile and bicycles 20p per mile. (The car and van rate rises to 55p per mile for the first 10,000 miles from 2026/27.) Keep a mileage log; HMRC expects one.
What is the 24-month rule?
This is the trap. A workplace counts as "temporary" (so travel there is claimable) only while you expect to be there for a limited time. It stops being temporary once you've spent, or expect to spend, 40% or more of your working time there over a period that lasts, or is likely to last, more than 24 months.
In plain terms: once you know a single client site will tie up most of your week for over two years, travel and subsistence to that site become disallowable, and the clock can start from the moment your expectation changes, not just when you hit month 24. HMRC's Employment Income Manual sets out the detail.
If your assignment is genuinely short or you split time across several clients, you're usually fine. If you're effectively embedded at one site long-term, get advice before you keep claiming.
Can I claim for working from home?
Most contractors do at least some work from home, so this comes up a lot.
If you're a director working from home, the company can pay you a flat use-of-home allowance without you having to prove specific costs. HMRC accepts a flat rate of £6 a week for household running costs, set out in its guidance on employees working from home. That's a modest claim, but it's simple and doesn't need receipts.
If you genuinely run the business from home and want to claim more, you can instead work out a fair proportion of actual costs, such as a share of heating and electricity based on the rooms used and the time spent working. That takes more record-keeping and a defensible method.
One caution: be careful about claiming a fixed share of costs like rent or mortgage interest through the company, as it can create personal tax and even Capital Gains Tax complications down the line. This is worth a quick conversation with your accountant rather than a guess.
What can't a contractor claim?
Some costs are simply not allowable, however much they feel like part of doing business:
- Client and business entertainment. Taking a client to lunch is not tax-deductible for the company.
- Everyday clothing. Suits and smart-casual wear fail the wholly and exclusively test, even if you only wear them for work.
- Fines and penalties. Parking fines, late-filing penalties and similar are never allowable.
- Your personal tax return. Preparing your own Self Assessment is a personal cost, not a company one.
- Personal items with incidental business use. A gym membership or a personal phone contract won't pass.
- Dividends. Dividends are paid from post-tax profit, so they're not an expense at all.
If a cost is mainly for your personal benefit, assume it's out unless you can show a clean business-only purpose or a fair split.
Worked example: a contractor's expenses for a year
Illustrative example. Priya is a contractor working through her own limited company. She's outside IR35. Over the 2025/26 tax year she records the following business costs. Figures are illustrative; the rates cited are the verified rates for the years shown.
| Expense | Amount |
|---|---|
| Accountancy fees | £1,200 |
| Business mobile (company contract) | £360 |
| Professional indemnity insurance | £450 |
| Laptop and monitor (claimed via AIA) | £1,400 |
| Industry software subscriptions | £600 |
| Use-of-home allowance (£6 x 52 weeks) | £312 |
| Train fares to a temporary client site | £980 |
| Total allowable expenses | £5,302 |
Suppose, before these expenses, Priya's company has trading profit comfortably within the £50,000 small profits band. The £5,302 of expenses reduces her taxable profit by the same amount.
At the Corporation Tax small profits rate of 19% for FY2025 (gov.uk), the tax saving is:
£5,302 x 19% = £1,007.38
So recording these costs properly saves her company just over £1,000 in Corporation Tax for the year. The expenses still cost real money; the point is that she pays no tax on income she had to spend to do the work. Forgetting even the smaller items, like the use-of-home allowance and software, would have quietly cost her tax relief.
To see how the money you take out of the company is then taxed personally, our take-home pay calculator is a good next step.
Does IR35 change what I can claim?
Yes, and it matters. IR35 (the off-payroll working rules) decides whether HMRC treats you as genuinely self-employed or as a "disguised employee" for a particular engagement.
If a contract is outside IR35, the expense rules in this guide apply in the normal way.
If a contract is inside IR35, most of your income from that engagement is taxed broadly like employment income, and the range of expenses you can set against it is far narrower. You can't simply run the usual list of travel, subsistence and home-working claims against inside-IR35 income.
Because the status decision drives both your tax and your expenses, it's worth getting it right. We explain the rules in more depth for IR35 contractors, and our pages for contractors and consultants and engineers cover the wider picture.
Frequently asked questions
Can I claim expenses I paid personally before the company was set up?
Often yes. Pre-trading expenses that would have been allowable if the company had already been trading can usually be treated as incurred on the first day of trade, provided they were incurred wholly and exclusively for the business and within the time limits. Keep the receipts and tell your accountant what you bought before incorporation.
Do I need a receipt for every single expense?
You need evidence you can stand behind. For most costs that means a receipt or invoice; for mileage it means a log of business journeys. HMRC can ask to see your records, normally going back at least six years, so "I'm sure I spent it" isn't enough on its own.
Can my company pay for my training?
It depends on the purpose. Training that updates or maintains the skills you already use for the company's trade is generally allowable. Training to learn a brand-new skill, or to start a different line of work, can be challenged as capital or personal, so check before you claim a large course fee.
Is a salary an allowable company expense?
Yes. A director's salary, processed correctly through PAYE, is an allowable cost for the company. Many contractors take a modest salary plus dividends, but dividends are not an expense; they come out of post-tax profit. Getting the salary-and-dividend mix right is a planning exercise worth doing each year.
Can I claim for client entertainment if it wins me work?
No. Business and client entertainment is specifically not deductible for Corporation Tax, regardless of how much business it generates. Staff entertainment is treated differently and has its own rules and limits.
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Key takeaways
- Claim a cost only if it's incurred wholly and exclusively for the business, or split out the clean business portion of a mixed cost.
- The expenses contractors miss most are the small recurring ones: use-of-home, software, professional subscriptions and business mileage.
- Travel needs care: ordinary commuting and anything caught by the 24-month rule is out.
- Keep evidence for at least six years, and check your IR35 status, because inside-IR35 work sharply limits what you can claim.
Talk to a Zmartly accountant about your contractor expenses
Not sure whether a cost is allowable, or whether the 24-month rule has caught your current contract? That's exactly the kind of thing we sort out every week. Our bookkeeping and tax advisory teams help limited company contractors claim what they're entitled to and keep clean records. Book a free call with a Zmartly accountant and we'll review your expenses with you.
