Last Updated on 06/01/2026
Allowable and disallowable business expenses
There are numerous allowable and disallowable business expenses in the UK that business owners need to be familiar with. HMRC has clear rules about business expenses, and it is vital to have a clear understanding of these rules to minimise your tax liability and ensure your tax calculations are compliant.
What are allowable business expenses?
HMRC states that allowable business expenses must be ‘wholly and exclusively’ for business purposes. Allowable business expenses can be deducted from your profit, reducing your taxable profit and tax liability. Common allowable business expenses are:
- Cost of goods purchased for resale or raw materials used in production
- Marketing and advertising expenses.
- Professional fees for accountants, lawyers and consultants.
- Staff costs, including salaries, national insurance, pensions and training.
- Office costs, such as stationery, phone bills and computer consumables.
- Business premise costs, such as rent, rates, utilities and insurance.
- Travel expenses for business purposes, like fuel, train fares, and hotel accommodation.
- Financial costs, such as bank charges and interest on loans.
What are disallowable expenses?
Disallowable expenses are costs that have an element of personal use or are specifically disallowed by HMRC. These cannot be deducted from your profits. Some of the more common disallowable expenses are:
- Entertainment costs for clients or suppliers.
- Charitable giving – only donations to HMRC-approved charities are allowable.
- Personal expenditure, such as your own clothing (unless it’s a business uniform or protective gear) and non-business travel.
- Fines and penalties, such as parking fines and HMRC fines.
- Capital expenditure and asset depreciation – capital tax allowances are available, which replace depreciation for tax purposes.
- Personal use of mixed-use expenses.
The above highlights the most common business expenses but is not a comprehensive list of all deductions. For more information about business expenses, use the HMRC links below:
Capital expenditure
Capital expenditure is money spent on acquiring tangible assets or used to improve assets, such as equipment, vehicles and computers used in the business. Unlike day-to-day operating expenses, the cost of acquiring fixed assets is spread over the expected useful life of the asset. This is done by expensing the expected annual costs as depreciation in the profit and loss statement.
Instead of using depreciation, HMRC provides capital allowances, which serve a similar function but have specific tax rules. Of the allowances, the Annual Investment Allowance (AIA) allows businesses to claim 100% tax relief on qualifying assets up to a certain threshold in the first year of purchase. You can find out more about the other available tax allowances using the HMRC link below:
Claim capital allowances: Overview – GOV.UK
Other allowable staff expenses
Staff parties
Annual staff parties up to a combined total of £150 (incl. VAT) per head are tax-deductible if they meet specific requirements, such as being open to all employees. If the total annual amount exceeds £150 per head, the full amount becomes taxable as a benefit in kind to employees.
The cost remains fully deductible for the business for corporation tax, regardless of whether the £150 per head threshold is exceeded. The business will, however, be liable for the employer’s national insurance on the full amount (currently 15%) if the £150 limit is exceeded. The staff benefit in kind will need to be declared on P11Ds, and employees will be taxed on the amount of the benefit.
Trivial benefits
Trivial benefits are small, non-cash gifts or perks worth £50 or less that can be given to employees tax-free, provided they aren’t cash or cash vouchers. Directors of closed limited companies are limited to £300 (6 x £50) worth of trivial benefits annually.
When individual trivial benefits exceed the £50 limit, the full amount becomes taxable as a benefit in kind to the employee. The business will be required to pay the employer’s national insurance on the benefit, but can claim the trivial benefit amount as an allowable deduction for business tax.
For more information about the staff benefits, use the HMRC links below:
Records and professional advisor
Understanding your business expenses is essential for accurate tax reporting and maximising tax efficiency. While this guide covers the most common allowable and disallowable expenses, tax rules can be complex and subject to change. If you’re unsure about whether a particular expense qualifies or how to handle mixed-use costs, it’s always advisable to consult with a qualified accountant or tax advisor.
Proper record-keeping with receipts and invoices is crucial – not only does it make claiming expenses easier, but it also provides the evidence HMRC may request during an enquiry. By staying informed and maintaining accurate records, you can ensure your business remains compliant while taking advantage of all legitimate tax deductions available to you.
