Claiming expenses: What contractors need to know to save money

For contractors working via a limited company on an outside IR35 contract, we’re hearing from them that it’s more and more important to maximise expenses, in light of less tax-free dividends since April 2024 and potentially more in corporation tax since April 2023.

So let’s look at the eligibility criteria for claiming expenses, the type of expenses you can claim and ultimately, how to maximise your income from your company so contractors can save money, writes Matt Fryer, managing director of Brookson, a People 2.0 company.

How to avoid corporation tax overstating

The key benefit in claiming expenses is that your company will receive corporation tax relief (at a rate of between 19% and 25%) based on company profits.

Therefore maximising expenses in a compliant manner ensures your corporation tax bill is not overstated.

This is particularly important where company profits are in excess of £50,000, as corporation tax rates start to rise to higher marginal rates above this annual amount.

What are eligible expenses?

As per HMRC guidelines, tax deductible expenses for contractors must be “wholly, exclusively and necessary” for your business.

Essentially, this means that the expense must directly relate to your company’s business activities. And so there should not be any personal element to the payment (although there are couple of exceptions where incidental personal use is accepted, for instance, a mobile phone or computer use).

How to claim expenses -- pay directly by the company or out of pocket, to reimburse?

Ideally as a director of a limited company (also known as a Personal Service Company), you should ensure, where possible, company expenses are paid directly from your company bank account.

For instance, a mobile phone should always be in your company name and paid directly from the company bank account.

Personal use is acceptable in this respect and there are no personal tax implications.

Incurring business expenses personally…

However, in some circumstances, you may incur expenses yourself and as such, you can claim personally incurred business expenses from your company. The key expenses reimbursed here are generally travel and associated subsistence costs.

Your expense claims form part of your accounting records and as such you should retain copies of the same/supporting receipts for at least six years. This evidence is necessary in the event of any unwanted interest from HMRC.

Not retaining evidence of your expense claim could lead to HMRC disallowing your expense claim without evidence of expenditure, so it is important that your paperwork is in order.

What are the principle expenses contractors can claim?

Most contractors should, as a minimum, consider the following tax-deductible expenses:

1. their salary;

2. any travel costs they incur;

3. company pension contributions.

1. Salary

A tax-efficient and optimal salary for 2024-25 is £1,047.50 per month (£12,570 per annum).

Where you take your salary level at this level, your company makes a corporation tax saving of between 19% to 25% on the salary cost. This salary level is optimal as part of a salary and dividends strategy for contractors who have no other income that uses up their personal allowance. This amount is the same as your personal, individual ‘tax-free’ allowance of £12,570; therefore, on a salary at this level, there’ll be no income tax or Employee’s National Insurance to pay.

2. Travel and subsistence costs

A contractor can claim travel expenses if they travel to a “temporary workplace.”

A temporary workplace is classed as a location where the employee attends irregularly or for a limited amount of time. Also, the travel to the workplace must be less than a period totalling 24 months. If you meet the criteria, eligible expenses are:

• Business mileage to and from work sites and on any other company business. This could include rail fares, flights, parking fees and tolls.
• Accommodation if you have any overnight stays while on company business.
• Associated business meals/subsistence while working away.

Personal incidental expenses of £5.00 per night when you are away from home overnight for work reasons. This covers sundry costs such as laundry, and a newspaper.

3. Company pension contributions

Once your company has set up a contract with a pensions provider, it can make payments into your pension pot and receive 100% tax relief as an allowable business expense.

In the 2024-25 tax year, there’s a limit of £60,000 on how much you can contribute free of tax to a pension scheme -- either through your company or personally.

14 other contractor expenses claims

Beyond this core trio of principle contractor expenses, as long as the expense claim meets HMRC’s ‘wholly, exclusively and necessary’ rule, then the following 14 expenses are also tax deductible in your company.

The following is not an exhaustive list and there may be other expenses you incur which meet this criteria but you are recommended to consult a knowledgeable, qualified and experienced contractor accountant:

1. Your limited company’s accountancy fees
2. Advertising and marketing incurred by your limited company
3. Business insurance
4. Business mileage
5. Charitable donations to a UK registered charity
6. Christmas party or other staff event (up to £150 per head)
7. Computer equipment and printers
8. Mobile phone
9. Professional subscriptions
10. Protective clothing
11. Relevant life policies
12. Training expenses (to enhance your existing work skills)
13. Trivial benefits (A gift to an employee as long as totals less than £50; isn’t cash/cash voucher, and is not a reward for work/performance).
14. Use of home as an office (if you regularly spend time working from home).

It is also worth noting that certain expenses are “capital” in nature, so although not expensed against company turnover, attract capital allowances of up to 100% of their cost as a tax deduction against company profits.

These include assets such as company vans/motor cars and expensive plant and equipment.

Can I claim expenses as an umbrella contractor?

In general, no.

An umbrella employee cannot claim allowable expenses (where deducted directly from your income), unless under the following circumstances apply:

• The travel is not part of your regular commute (so irregular and infrequent attendance at a site which is not your normal worksite and your permanent site has been verified);
• Your expense claim is supported by expense receipts;
• The expense has been incurred wholly, exclusively and necessarily for the purpose of your contract/assignment/employment duties; or
• Your client agrees to reimburse you for the expenses;

And finally, expenses shouldn’t ever be an island

Claiming expenses is a key part of what a limited company contractor needs to know to save money but it’s only one part. We would always advocate speaking to your accountancy adviser or financial adviser in respect of your company and personal tax planning to consider all the options available to you.