Allowable and Disallowable Expenses in the UK: Explained in Detail

Ever wondered which of your business costs can actually save you money at tax time and which ones can’t? That’s exactly what the details of Allowable and Disallowable Expenses in the UK will help you figure out. Think of it as the difference between a helpful receipt and a wasted one. 

Whether you're a sole trader, freelancer, or small business owner, knowing which costs you can claim will help you manage your finances smartly and legally. In this blog, we break down the essential details on Allowable and Disallowable Expenses for corporation tax and individuals. So read on and keep your finances sharp, legal, and HMRC-approved. 

Table of Content 

1. What are Allowable Expenses? 

2. What Can You Claim as an Allowable Expense? 

3. What are Disallowable Expenses? 

4. Disallowable Expenses That Can't be Claimed as Corporation Tax 

5. Allowable Expenses for Individuals 

6. Allowable Expenses for Businesses 

7. Disallowable Expenses for Individuals and Businesses 

8. Conclusion 

What are Allowable Expenses? 

Allowable Expenses refer to the costs or expenses you run up when running your business that you can claim as tax deductions. Since such expenses are not taxable, they help you reduce the amount you pay on your profits. 

Here’s an example: Imagine your business earned £50,000 over the year, and you spent £8,000 on allowable business expenses. You won’t be taxed on the full £50,000, only on £42,000, since the £8,000 was used entirely for running your business. To count as allowable, an expense must be used only for business purposes, not for anything personal. 

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What You Can Claim as an Allowable Expense? 

The costs that can be claimed as Allowable Expenses include the following: 

1. Office Costs: Phone bills, stationary bills or other items that you use for less than two years. 

2. Staff Costs: Wages, salaries, bonuses and pensions. 

3. Legal and Financial Costs: Overdraft fees, credit card charges, insurance policies or hiring the services of Bookkeepers, Accountants, Solicitors or Surveyors. 

4. Advertising and Marketing Costs: Printed adverts and cost of building a website. 

5. Items That You Only Buy to Sell: Raw materials or merchandise. 

6. Costs of Business Premises: Utility bills and rent. Costs associated with buying property are not considered Allowable Expenses. 

7. Travel Costs: Fuel, parking or train tickets. Remember, travel to and from work doesn't count as an allowable expense. 

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What are Disallowable Expenses? 

Disallowable Expenses are costs that may seem business-related but can’t be used to lower your corporation tax in the UK. It’s easy to mix them up with Allowable Expenses. A good rule is that if the expense benefits you personally, even a little, it’s likely disallowable and taxable. This includes things like perks or benefits given to employees or Directors. 

For instance, if your company pays for a director’s gym membership or a family holiday under the business account, those expenses are considered disallowable. Even though they are paid from company funds, they provide personal benefits. Since they don’t serve a direct business purpose, they can’t be claimed against tax. 

Disallowable Expenses That Can't be Claimed as Corporation Tax 

Here are the main examples of Disallowable Expenses that are not eligible for a corporation tax deduction: 

1. Business Entertainment: Entertainment, gifts and hospitality you offer to customers, clients or suppliers. 

2. Clothing: Everyday clothing is counted as a disallowable expense. 

3. Asset Depreciation: Costs incurred while managing the depreciation of assets such as cars and other work equipment are classed as disallowed expenses. 

4. Fines and Penalties: The costs incurred due to breaking the law. Examples include VAT penalties and parking fines. 

5. Loan Repayment: Overdrafts count and Personal loans (even if it’s to run your business) are considered Disallowable Expenses. 

6. Donations: Any donations made to charities, clubs, or political parties are treated as Disallowable Expenses. 

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Allowable Expenses for Individuals 

There are numerous Allowable Expenses for self-employed individuals who seek to optimise their self-employed expenses to reduce their tax payment amount. The following are some of the most common deductions: 

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1. Medical Expenses: Costs for medical care, prescriptions, and certain medical equipment can be deducted if they exceed a certain percentage of your adjusted gross income. 

2. State and Local Taxes: You can deduct state and local income or sales taxes and property taxes up to an aggregate limit. 

3. Mortgage Interest: Interest paid on a qualified residence mortgage is deductible. 

4. Charitable Contributions: Donations to qualified charitable organisations can be deducted, subject to certain limitations. 

5. Education Expenses: Tuition and fees for higher education may be deductible or eligible for tax credits. 

6. Retirement Savings: Contributions to retirement accounts like IRAs and 401(k)s can be deducted. 

7. Child Care Expenses: Costs for child care while you work or look for work can be deducted. 

8. Casualty and Theft Losses: Losses from federally declared disasters or theft can be deducted, subject to limitations. 

9. Health Insurance Premiums: Premiums paid for health insurance, especially if you're self-employed, can be deductible. 

10. Investment in Clean Energy: Expenses related to clean vehicles or home energy improvements may qualify for deductions or credits. 

Allowable Expenses for Businesses 

Here are the common business expenses you can claim in the UK if they’re paid through your company’s bank account and used only for your business: 

1. Salaries and Wages: You can claim staff wages, pensions, benefits, subcontractor costs, National Insurance, and training related to work. 

2. Rent and Utilities: Rent for your business space and utility bills are claimable. If you work from home, you can claim a part of your home expenses. 

3. Office Supplies and Stationery: Items like stationery, phone bills, postage, printers, and software (used under 2 years or on a renewable license) are Allowable Expenses. 

4. Advertising and Marketing: Costs for ads, flyers, samples, and website expenses can be claimed on your taxes. 

5. Travel Expenses: You can claim fares, fuel, hotel stays, and meals during business travel for you or employees. 

6. Business Insurance: Insurance policies like business cover or professional indemnity are tax-deductible. 

7. Professional Fees: You can claim fees for services like Accountants, Lawyers, or Architects used for business. 

8. Depreciation: Some assets like cars, machinery, or buildings can be claimed over time through specific allowances. 

9. Bad Debts: If you're owed money that can’t be recovered or loans have very high fees or interest, you might be able to claim them. 

10. Research and Development (R&D): You can claim costs related to R&D projects, such as materials, freelancers, and testing. 

11. Training and Development: Staff training related to their job like learning new tools or software can be written off. 

12. Interest and Bank Charges: You can claim interest on business loans, overdraft fees, leasing costs, and credit card charges. 

13. Stock and Inventory Costs: Costs for buying goods to sell, raw materials, and anything directly related to selling stock are allowable. 

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Disallowable Expenses for Individuals and Businesses 

Here are the Disallowable Expenses for individuals and businesses: 

Individuals and Businesses Disallowable Expenses 

Conclusion 

Having a firm grasp on the Allowable and Disallowable Expenses can help you manage your business finances wisely and stay on the right side of HMRC. Knowing what you can and can’t claim will help you save money, avoid penalties, and keep your tax return in top shape. After all, smart spending starts with informed decisions. 

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