Incurring expenses is an unavoidable fact of running a business. But there are ways to reduce the impact of these expenses, by claiming the relevant costs against your tax bill.
Here’s our lowdown of which common expenses are tax deductible, and the advantages of claiming these costs to cut down your operational and personal expenses.
1. Home-working expenses for your home office
If your home office is your main place of business, you can claim back some of your home-working expenses. There are four groupings which your business must fall into: Limited Company or Unincorporated, with each claiming at either a flat rate or a higher amount.
- Limited Company & Flat Rate: a flat rate of £6 per week (£4 up to 5th April 2020) can be claimed against your home expenses.
- Unincorporated & Flat Rate: this is intended for unincorporated businesses (sole traders etc.) who work from home. It’s broken down into three scaled categories:
- If you work at home 25-50 hours/month, you can claim £10/month,
- If you work 51-100 hours/month, you can claim £18/month,
- If you work 101+ hours/month, you can claim £26/month.
- Limited Company & Higher Amount: you can enter into a rental agreement with your company, with the rental price usually worked out as the share of mortgage interest or rent, council tax, utilities and buildings insurance. If there are six rooms in the house (ignore halls, kitchens and bathrooms) and one is used for the business, then you would base the rental on 1/6th of those costs.
- Note re repairs: repairs for your ‘home office’ room can be claimed back in full, and repairs for other rooms can’t be reclaimed at all. General repairs to the house (e.g. re-tiling the roof) can be claimed proportionally, so 1/6th in the example we’ve given.
- Unincorporated & Higher Amount: an unincorporated business can’t charge rent as such, so no formal agreement is needed. But you can claim back an amount against tax, calculated in exactly the same way as for a limited company. In order to ensure no capital gains tax issues arise, try to ensure that no room in the property is exclusively available as a home office.
In order to ensure no capital gains tax issues arise, try to ensure that no room is exclusively available for business use. For example, put an exercise bike into a room used as an office and have specific periods of time blocked out where the room is not available for business use.
2. Expenses for staff parties and social events
Staff events, like your end-of-year party or your summer barbecue, are tax-deductible for you, as the employer, and tax-free for your staff. This means you can claim back some of the expenses you incur when putting on a social event for your team. You will also be helping to build better team bonds.
- How do I know if my event is eligible? – for your event to be eligible, it must be company-wide and meet the requirements of a structured social event. As long as all staff are covered somewhere, there can be separate functions for branches, departments, or other office locations etc.
- What records do I need to keep? – as a company, you’ll need to keep records of who was invited to the social event, and who actually attended. You’ll also need to record the costs of putting on the event, including all associated travel and accommodation.
- What’s the expenses limit per person? – there’s a limit per attendee (including partners invited as guests) of £150 including VAT. This total can be split over multiple functions. NOTE: this can’t be disguised client entertaining. Guests must be employees or their partners and not clients or suppliers etc.
3. Offsetting your pension contributions
If you want to cut your corporation tax expenses, one key area to think about is your director pension contributions. These contributions can be offset against your taxable profits.
Pension contributions for directors of up to £60K per annum can be deducted from your taxable profits. With a tax saving of 19%-25% of your pension contribution, this could potentially save you £15,000 per company director. A nice helping hand if you’re aiming to cut your tax costs!
4. Business mileage and travel costs
If you use your personal vehicle for business purposes, you may be able to claim a tax deduction for your travel costs. HM Revenue and Customs (HMRC) allows two methods for calculating business mileage expenses:
- Actual expenses method: Under this method, you can claim the actual costs incurred for running your vehicle for business purposes, such as fuel, repairs, maintenance, insurance, and depreciation.
- Mileage rate method: Under this method, you can claim a fixed amount per mile for the business mileage. The mileage rate varies depending on the type of vehicle and the number of miles driven. As of the 2023/24 tax year, the mileage rates are:
- Cars and vans: 45p per mile for the first 10,000 miles and 25p per mile thereafter.
- Motorcycles: 24p per mile.
- Bicycles: 20p per mile.
5. Employers’ NICs (National Insurance Contributions)
Employment Allowance allows eligible employers to reduce their National Insurance Contributions (NICs) bill by a certain amount each year. As of the 2023/24 tax year, if you meet the eligibility criteria, you can reduce your employer NICs bill by up to £5,000 each year
To be eligible for the Employment Allowance, you must:
- Have a business that pays Class 1 NICs on employees’ or directors’ earnings.
- Have an employer NICs bill of less than £100,000 in the previous tax year.
- Not be a domestic employer, such as a nanny or gardener.
- Not have already claimed the allowance through a connected company or charity.
Talk to us about reducing your business expenses
This isn’t an exhaustive list of tax-deductible expenses. There will be various ways to claim your operational expenses against the relevant reliefs and incentives offered by HMRC.
If you’re looking to cut back your costs and improve your tax efficiency, we can help. Talk to us about your regular operational expenses and tax costs and we’ll work with you to find the important reliefs, incentives and allowances that can be claimed.
Get in touch to start reducing your expenses.