Running a company involves plenty of costs. Most reduce the profit on which you pay Corporation Tax, but the way you receive relief varies. Some costs are deducted in full, some are relieved over time, and others are not allowable.
Understanding the difference helps you make informed decisions and claim what your company is entitled to. Here, we explain the rules and rates for 2026/27.
What is a deduction worth?
Corporation Tax is 19% on profits up to £50,000 and 25% above £250,000, with marginal relief in between. The effective rate on profits within that band is 26.5%.
That means £1,000 of allowable spending saves your company between £190 and £265 in tax. The deduction reduces your tax bill at the relevant rate, rather than giving you the full £1,000 back.
The test for allowable expenses
A cost is deductible if it is incurred wholly and exclusively for your company’s trade.
Where a cost has a mixed business and personal purpose, it fails this test unless the business element can be identified and separated. Itemised business calls on a phone bill are one example.
It also helps to look at two separate questions:
- Does the company receive Corporation Tax relief? Usually yes, for expenditure on the trade or on employees.
- Does the director or employee pay personal tax? Sometimes. Private medical insurance for a director, for example, is deductible for the company but creates a taxable benefit for the director. It is reported on a P11D, with employer’s Class 1A National Insurance at 15%.
We look at both sides when reviewing your expenses, so you understand what a company deduction means for your personal tax position too.
Everyday business running costs
The following costs are deductible in full in the year you incur them:
- Rent, business rates, heating, lighting and cleaning for business premises.
- Stationery, printing and postage.
- Software subscriptions and cloud services.
- Phone and broadband contracts in the company’s name.
- Bank charges and interest on business borrowing.
- Repairs and maintenance.
Repairs or improvements?
Restoring something to its original condition is a repair and is deductible. Making it better or bigger is capital expenditure.
Replacing broken roof tiles or redecorating is a repair. Building an extension is not.
Capital expenditure on property receives no immediate deduction, although fixtures such as heating, lighting and air conditioning usually qualify for capital allowances. We explain these below.
Professional fees, subscriptions and insurance
You can deduct:
- Accountancy, bookkeeping, payroll and audit fees.
- Legal fees for trading matters, including customer and supplier contracts, debt recovery and employment issues.
- Business insurance, including public liability, employers’ liability, professional indemnity, buildings and contents cover.
- Professional subscriptions on HMRC’s approved list, such as ICAEW or CIPD. These are also tax-free for the employee.
Legal and professional fees connected with buying property, raising share capital or other capital transactions are not deductible. They are added to the cost of the asset instead.
What about your personal tax return?
If the company pays for a director’s personal tax return, it receives a deduction, but the fee is a taxable benefit for the director.
The cleaner route is usually to charge the fee to your director’s loan account or pay it personally. We can arrange this in the way that suits your remuneration.
Marketing, gifts and entertaining
Advertising and marketing costs are deductible. These include campaigns, social media management, SEO, promotional printing, website hosting and maintenance, and sponsorship that provides a genuine advertising return.
A new website build is normally treated as a capital asset. In most cases, the company still receives full relief in the year of expenditure through capital allowances or the accounting treatment. We agree the approach with you before preparing the accounts.
Client and employee entertaining
Client entertaining is never deductible, however much business you discuss. The VAT cannot be reclaimed either.
Employee entertaining is deductible. An annual event, such as a Christmas party, is also tax-free for employees if it is open to everyone and costs no more than £150 per person, including VAT.
Gifts to clients
Client gifts are deductible only where they:
- Cost no more than £50 per person per year.
- Carry a conspicuous advertisement for your business.
- Are not food, drink, tobacco or vouchers.
A branded notebook meets these conditions. A bottle of wine does not.
Salaries, benefits and pension contributions
Salaries and bonuses for directors and employees are deductible, alongside employer’s National Insurance at 15% on earnings above £5,000 a year.
A bonus accrued in the accounts must be paid within nine months of the year-end to be deducted in that year.
Most employers can also claim the £10,500 Employment Allowance against their National Insurance bill. This does not apply to a company whose only paid employee is a sole director.
Dividends
Dividends are paid from profits after Corporation Tax. They are not an expense and do not reduce the company’s tax bill.
We review the balance between salary and dividends with you each year.
Trivial benefits
A trivial benefit is tax-free for the employee and deductible for the company where each benefit:
- Costs £50 or less.
- Is not cash or a cash voucher.
- Is not a reward for work.
Directors of close companies have a £300 annual cap.
Employer pension contributions
Employer pension contributions are one of the most tax-efficient ways to extract profit. They are deductible in the accounting period in which they are paid, carry no National Insurance and are not limited by the director’s salary.
The relevant limit is the director’s personal annual allowance, normally £60,000, plus any unused allowance from the previous three years.
Contributions must be paid by the year-end, rather than simply accrued, to count for that year.
Travel, mileage and company cars
Business travel is deductible. This includes trips to clients, suppliers, conferences and temporary workplaces, together with the associated accommodation and meals.
A workplace is temporary if you expect to work there for less than 24 months.
Commuting between home and a permanent workplace is private travel, even if you work from home on some days. Your home only counts as a workplace if the job genuinely requires you to work there, rather than because it is convenient.
Using your own vehicle
The company can reimburse qualifying business mileage tax-free at HMRC’s approved rates and deduct the cost.
The car rate increased from 45p to 55p on 6 April 2026.
| Vehicle | First 10,000 business miles | Above 10,000 business miles |
| Car or van | 55p | 25p |
| Motorcycle | 24p | 24p |
| Bicycle | 20p | 20p |
These rates cover running costs, so you cannot claim fuel, insurance or servicing on top. Keep a record of each journey’s date, purpose and mileage.
Company cars
The company deducts running costs and claims capital allowances on the purchase.
New zero-emission cars qualify for a 100% first-year allowance until 31 March 2027.
The director pays benefit-in-kind tax based on the car’s list price and CO2 emissions. For an electric car, this is 4% of list price in 2026/27, compared with up to 37% for a petrol or diesel car.
Working from home
There are two routes, and most director-owned companies should use one of them.
1. A homeworking allowance
If you regularly work from home under an agreed arrangement, the company can pay you £6 a week, or £26 a month, tax-free without receipts. It can pay more where you keep evidence of the additional household costs.
Since 6 April 2026, employees can no longer claim this relief directly from HMRC, so payment through the company is now the only route.
Home office equipment provided or reimbursed by the company is also tax-free, provided private use is incidental.
2. Rent for using your home
For a larger claim, the company can pay a commercial rent under a written licence for the space it uses.
The company deducts the rent. You declare it as property income and offset the corresponding share of household costs, so little or no tax arises if the rent reflects real costs.
The room should not be used exclusively for business, to protect your Capital Gains Tax relief when selling your home.
We draft the licence and calculate the figure with you. What you cannot do is put a share of every household bill through the company without one of these arrangements.
Computers, tools and equipment
Equipment receives tax relief through capital allowances rather than depreciation, which is added back in the tax calculation.
For most small companies, this means 100% relief in the year of purchase.
| Allowance | Relief | What it covers |
| Annual Investment Allowance | 100% in year one, up to £1 million a year | Most new or second-hand plant and machinery, including computers, furniture, tools, machinery and vans. Cars are excluded. |
| Full expensing | 100% in year one, with no cap | New main-rate plant and machinery bought by companies. |
| First-year allowance | 40% in year one | New main-rate assets qualifying for neither of the above, such as assets bought to lease out, from 1 January 2026. |
| Writing down allowance | 14% a year on the reducing balance | Other qualifying expenditure, including most cars. Reduced from 18% on 1 April 2026. |
Timing matters. Buying a qualifying asset one day before your year-end brings the whole deduction into that year.
Selling an asset on which you have claimed allowances can claw relief back, so speak to us before a substantial purchase or disposal.
When the company pays a personal cost
A personal payment through the company can be put right, but it needs to be recorded correctly as one of three things:
- Salary or a benefit: the company receives a deduction, you pay Income Tax and the company pays National Insurance.
- A dividend: the company receives no deduction, and sufficient retained profits must be available.
- A director’s loan: the payment is charged to your loan account.
If a director’s loan account is overdrawn at the year-end and not cleared within nine months, the company pays a temporary section 455 charge of 35.75% on loans made from 6 April 2026. This is refunded once you repay.
Loans above £10,000 also create a taxable benefit unless you pay interest at HMRC’s official rate.
We review your loan account before each year-end so you know where you stand.
Records and VAT
Keep invoices, receipts, mileage logs and expense claims for six years from the end of the accounting period they relate to. Digital copies are fine.
Corporation Tax relief and VAT recovery follow separate rules. You cannot reclaim VAT on client entertaining and can rarely reclaim it on buying a car. VAT on most other business costs is recoverable if your company is VAT registered.
Get clarity on your company expenses
You should feel confident about which costs belong in your company’s accounts and when to ask for advice.
SMH Group’s Accounting & Business Advisory team can help you review expenses, organise your records and understand significant purchases before you commit.
Get in touch with SMH Group to discuss your company accounts and expenses.
Comments are closed.