Allowable expenses and capital allowances, explained
Written by Akhtar Rana, FAIA · Last reviewed
A company can deduct costs incurred “wholly and exclusively” for the business from its profit before Corporation Tax, things like wages, premises, software and professional fees. Equipment is handled separately through capital allowances, with the £1 million Annual Investment Allowance and full expensing giving up to 100% relief. Some costs, such as client entertainment and most fines, are never allowable.
Figures are correct at the date of review. Always check GOV.UK for the latest.
The “wholly and exclusively” rule
The basic test is simple: a cost is allowable if it’s incurred wholly and exclusively for the purposes of the trade. That rules out anything with a private benefit, unless the business part can be clearly separated (like the business proportion of a home office or a phone). Get this right and your taxable profit, and your tax, is genuinely lower. Get it wrong and you risk claiming things HMRC will disallow.
Common allowable expenses
Everyday costs most companies can claim include: staff wages and your own salary, employer pension contributions, rent, utilities and premises costs, accountancy and legal fees, insurance, software and subscriptions, marketing, business travel and mileage, stock and materials, bank and finance charges, and the business share of home and phone costs. Good bookkeeping is what makes sure none of these are left out.
Revenue costs vs capital: an important line
Day-to-day running costs (revenue) are deducted in the year you incur them. Buying an asset that lasts (capital), like equipment, machinery or a van, is handled through capital allowances instead. The distinction matters because it changes when and how you get the relief.
Capital allowances: AIA and full expensing
This is where big purchases become tax-efficient:
- The Annual Investment Allowance gives 100% relief on up to £1 million of qualifying plant and machinery in the year you buy it.
- Full expensing gives a 100% first-year deduction on qualifying new main-rate plant and machinery, with no cap.
- Anything not covered by those is written down gradually through writing down allowances.
- Cars have their own rules, based on CO2 emissions, so electric and low-emission cars are treated more generously.
What’s NOT allowable
Some costs feel like business expenses but can’t be deducted for Corporation Tax: client entertainment, most fines and penalties, depreciation (capital allowances replace it), and anything genuinely personal. Knowing the difference keeps your return correct and avoids trouble later.
Want to make sure you’re claiming everything? Take our 2-minute quiz, or read how to reduce your Corporation Tax next.
Akhtar Rana, FAIA
Akhtar is the founder of Xpert Tax Accountants and a Fellow of the Association of International Accountants, holding an AIA practising certificate. He works with business owners across Greater Manchester and the rest of the UK.
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Xpert Tax Accountants is regulated by the AIA. We are not authorised by the Financial Conduct Authority and do not give investment, pension or insurance advice.
Xpert Tax Accountants is regulated by the Association of International Accountants. We are not authorised or regulated by the Financial Conduct Authority and we do not give investment, pension or insurance advice, or arrange financial products. Our content is general information about UK tax, not advice for your circumstances, and no responsibility is accepted to any person acting on the basis of it.
Frequently asked questions
Common questions about what you can and can’t deduct.
What expenses can a limited company claim?+
Costs incurred wholly and exclusively for the business: wages, premises, software, professional fees, insurance, marketing, travel, and the business share of home and phone costs, among others. Equipment is claimed through capital allowances.
What’s the difference between expenses and capital allowances?+
Revenue costs (day-to-day running expenses) are deducted in the year you incur them. Capital items (assets that last, like equipment) are relieved through capital allowances, such as the Annual Investment Allowance and full expensing.
Can I claim client entertainment against Corporation Tax?+
No. Client entertaining is specifically not allowable for Corporation Tax, even though it’s a real business cost. Staff entertaining is treated differently within limits.
What is full expensing?+
A 100% first-year capital allowance on qualifying new main-rate plant and machinery, with no upper limit, letting companies deduct the full cost in the year of purchase.
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