Limited company expenses are used to reduce the level of profitability in your company accounts. That means your corporation tax bill to HMRC goes down.
For many new business owners, there can be a lot of confusion about what qualifies and what doesn’t as expenses. Here is the Wise Accountant’s look at the expenses your company can claim and the ways you, as director, can feel the benefit yourself personally.
Your staff may be your greatest asset but financially they’re a huge liability. Thankfully though, almost all of the costs you’ll incur with your staff are allowance expenses for a limited company.
You can deduct all salary payments and pensions contributions from your profit. That also includes the income tax and National Insurance Employee’s Contribution you have to collect from your staff when you pay them.
It comes as a shock to most new employers but there is one more tax you have to pay when you’ve got staff. That tax is called National Insurance Employer’s Contribution. This is a tax of 13.8% of a staff member’s wage above a certain level of salary.
Employees and directors can receive tax-free health benefits if the person receiving treatment is overseas and where you have committed in advance to pay or where you have arranged and paid the provider director for the person’s treatment or insurance. If this treatment takes place in the UK, it is a taxable benefit.
Within the UK, as long as everyone at the company is offered these benefits, directors and employees can receive, with no tax or NI implications, one medical check or health screening per year, eye tests plus glasses and contact lenses (where the employee or director uses a computer monitor or other screen), and medical treatment or insurance for injuries or diseases relating to a person’s actual work.
The first £500 of costs related to an employee or director returning to work is tax-free if they have been assessed by a professional as unfit for work (or who will be unfit for work) because of injury or ill health for at least 28 consecutive days or who has been absent from work because of injury or ill health for the same time period.
As long as an employees and directors are offered free or subsidised meals at an employer’s place of work, all meals are tax-free and are deductible from profits.
After 20 years of service, directors and employees can extract up to £1,000 (equivalent to £50 per year of service) as a reward.
Cash, cash vouchers, credit tokens, shares, and securities cannot form part of this award, however it can be used towards the purchase of something nice like a watch, a handbag, or a 65” widescreen digital colour television set with UHD and HDR!
If you spend more than £1,000 on the gift, only the part of the reward that exceeds £50 per annum is subject to taxation in the normal way. If you intend to celebrate 21 long years of service, or some other measurement of time, please be aware that the money spent on the 20th anniversary awards is taken into account when calculating the amount available that is tax free for the later rewards.
As a director, you can take small amounts of profit from your company without being concerned about tax and NI with the “trivial benefits” benefit in kind. Up to £300 is available with no more than £50 being spent on any individual treat – for example, tickets to sporting events, wine, a meal out, a spa treatment, and so on. This exemption does not cover cash or cash vouchers. You can offer these trivial benefits to your staff up to a limit of £50 per person per year but please be careful – if your expenditure on that staff member is more than £50, then the entire amount becomes taxable.
As with most other benefits in kind, the total sum spent (either £300 or £50) can be deducted from the profit the company makes for corporation tax purposes.
Travel and accommodation costs
Directors and employees can take advantage of tax-free mileage rates to refund business mileage and these are allowable deductions from profit. If you or your family members use your own cars for business mileage, paying yourselves a business mileage allowance is very efficient way of drawing money from your company. Payments are made free of tax and there is no need to report the payment to HMRC. The rates of business mileage in the 2019/2020 tax year are:
|Type of vehicle||First 10,000 business miles in the tax
|Business miles in excess of 10,000 in
the tax year
|Car and van||45p per mile||25p per mile|
|Motorcyles||24p per mile||24p per mile|
|Bikes||20p per mile||20p per mile|
The mileage allowance is also paid free of NICs. You can also claim passenger payments of 5p per mile where your passenger is also on a business journey (for example, in a family company, a director giving a lift to his or her spouse).
Taxis can be provided to employees or directors with no tax or NI consequences if the person taking the taxi has been required to work later, that asking them to work late is irregular, and that there is no public transport available at the time the work finishes. You must not provide them on more than 60 occasions a year.
Rather than the employee or director meeting the cost, the company should pay the fare to save tax and NI as this is deductible against corporation tax.
Overnight expenses are one of the smaller benefits in kind but if you travel often enough for business, you can claim £5 per night in the UK or £10 overseas to cover overnight expenses, including newspapers. When added together, all of these smaller sums can be paid free of tax and NI and can be deducted when calculating your company’s corporation tax liability.
You can also reduce corporation tax by claiming subsistence payments including business phone calls, congestion charges, tolls, and parking charges.
Employer-provided bikes, helmets, and related safety equipment can be provided to employees and directors with no taxable benefit if the property remains in the ownership of the company, the bicycle is used mainly for home to work journeys or other business travel, and that every employee and director is offered the benefit.
Home office costs
There are two ways you can claim for the use of a home office against your company profits. The first is the flat rate method from HMRC:
|Hours worked at home per month||Amount you can claim per month|
|0 to 24||£2|
|25 to 50||£10|
|51 to 100||£18|
|101 or more||£26|
There is a more elaborate way you can claim home office which considers:
• the total cost over a year of your rent/mortgage, telecoms, internet, utilities, and more
• divide that cost by the number of rooms you have in your house, then
• take that figure, divide it by forty, and then multiply it by the number of hours you spend in your home office on an average week.
Your limited company can also rent a room in your house as if it was an additional office. All rental payments (as long as they reflect market value in HMRC’s opinion) are deductible against your profits. If you make a profit above what HMRC would consider to be a fair rent for the room in your house, this will add to your personal tax liability.
Communication costs can be deducted from your profit figures, including landlines, broadband, mobiles, smartphones, and the cost of any business calls. You can also claim against all stationery, postage, and printing charges.
BusinessCostSaver tip – if you’re working from home, you can’t claim back line rental charges on a landline that are used, even very infrequently, for personal reasons. If you install a second line just for business, make sure it’s in the business’s name and the business pays the direct debit.
BusinessCostSaver tip – you can claim back all line rental, mobile internet, phone call, and texting charges for mobile phones. However, the mobile phone account will need to be in the name of the business and the business will need to pay the bill.
Bank charges and business insurance costs can also be claimed in full (including insurance premium tax).
You can claim back all computer and computer-related expenses however if anything you’ve bought for the business is also used by you personally, HMRC will treat this as a benefit-in-kind and they will tax you for 20% of the cost of the computer. This benefit-in-kind is also likely to attract a charge for National Insurance Employer’s Contribution.
Advertising and marketing are crucial ways for companies to bring in new customers and new orders.
All of these costs, whether newspaper advertising, Google Adwords, TV advertising, Facebook advertising, and more are fully deductible.
The cost of any accounting and bookkeeping related to the business can be taken from profits. Any work on personal taxation your accountant does for you (for example Self Assessment) however is a personal expense and can’t be claimed as a personal expense.
Likewise, any legal bills that your company faces can be used to reduce profits.
Many directors will use loans to fund the start of their company. If that’s you, you may wonder if you should your company interest on the loan. There’s absolutely no reason you shouldn’t charge your company interest.
The interest you’re paid will likely be a tax-free way of earning money given that all basic rate taxpayers now have a £1,000 yearly savings interest allowance on which they don’t have to pay tax. For higher rate taxpayers, the sum is £500. There’s no allowance for additional rate earners.
The company can deduct the interest it pays and saves money because it doesn’t have to pay National Insurance Employers’ Contribution on the interest you’re receiving.
Interest paid by a company to an individual must be paid net of 20% tax, as banks did until 5th April 2016 (banks now pay interest gross, without deduction of tax).
The company must notify HMRC of any interest paid to UK resident individuals on a quarterly basis using a CT61 form, and the 20% tax deducted must be paid to HMRC at the same time.
From a corporation tax point of view, you can claim writing down allowances against company cars every year. What this does is show the depreciating value of your car on an annual basis. You can subtract that depreciation from your profit to lower your corporation tax.
There is a £150 per head exemption, again deductible from profits, for Christmas and annual parties exists – this figure includes costs incurred by guests as well as directors and employees. For family companies, this is often used to provide participants with an enjoyable tax- and NI-free evening for a Christmas family meal and, where the allowance has not been used up, sometimes an additional event too.
The payments on assets that your company uses which it has hired on a Hire Purchase agreement are also fully deductible from profit.
Annual investment allowance
Your company is also able to claim back on any plant or machinery it buys over the course of a year. This is called the annual investment allowance. Its rate has varied over time but its current limit is £1,000,000
|Annual investment allowance (limited companies)||1st Jan 2019 – Present||1 January 2016 to 30 December 2018||6 April 2016 – 31 December 2015||1 January 2013 – 5 April 2014|
You can’t claim annual investment allowance against cars. Nor can you use it for any items or assets that you bring into your business that you owned in a personal capacity beforehand.
The Annual Investment Allowance can be used on assets and items that are used exclusively for your business, alterations you make to a building so that it can accommodate new plant and machinery, the costs you incur in demolishing plant and machinery, “integral parts” of a building, and fixtures within a building.
It’s the job of your accountant to claim back as many costs as possible to bring down your level of profitability so that your corporation tax is reduced.
The Wise Accountant would also remind you though that it’s your responsibility to let your accountant know what you’ve spent money on so it can be claimed back in the right way and to always keep copies of your receipts.