CORPORATION TAX GUIDE

Allowable expenses for limited companies.

Every cost your company can properly claim lowers the profit it pays Corporation Tax on. This guide sets out the test HMRC applies, the costs that usually pass it, the ones that do not, and the records that hold a claim together.

Figures for the 2026/27 tax year · Last reviewed 21/10/2026

The one test every expense has to pass

A limited company pays Corporation Tax on its taxable profit. That profit is its income less the costs the tax rules allow it to deduct. If you are a sole trader rather than a company, see self-employed allowable expenses.

The central rule is that a cost must be incurred "wholly and exclusively" for the purposes of the trade. For companies this rule sits in section 54 of the Corporation Tax Act 2009. In plain terms, the company must have spent the money to run its business, not to give someone a private benefit.

A cost that fails the test can still be paid by the company. It just cannot reduce the taxable profit.

What a deduction is worth

For the financial year starting 1 April 2026, GOV.UK gives these Corporation Tax rates:

Profits of £50,000 or less: the small profits rate of 19%
Profits over £250,000: the main rate of 25%
Profits between the two: the main rate, reduced by Marginal Relief

The £50,000 and £250,000 limits are cut for short accounting periods and shared between associated companies. So a company paying the small profits rate saves 19p of tax for each £1 of allowable cost it records.

Running costs most companies can claim

Most of what a company spends to trade day to day will pass the test, as long as the business purpose is real. Common examples include:

Stock and materials: goods bought to sell, or used up in the work
Premises: rent, business rates, utilities, cleaning and repairs for the place the company works from
Office running costs: software subscriptions, phone and broadband contracts, stationery and postage
Professional fees: accountancy, bookkeeping and legal work for the business
Insurance: business cover such as public liability or professional indemnity
Marketing: advertising, websites and printed materials
Finance costs: bank charges and interest on business borrowing
Business travel: journeys made for the business, with the costs that go with them

Paying directors and staff

Salaries paid to directors and employees are normally a cost of the company, but they still have to meet the wholly and exclusively test. Once the company pays a salary, expenses or benefits, it must register as an employer. It then runs payroll, deducting Income Tax and National Insurance, and may also owe employer's National Insurance.

Pension contributions

Employer contributions to a registered pension scheme can be deducted, but HMRC applies the same wholly and exclusively test. Its manual says relief is only given on contributions that have actually been paid, and that contributions for controlling directors get extra attention.

Dividends are not an expense

A dividend is a share of profit paid to shareholders. GOV.UK is clear that dividends cannot be counted as business costs for Corporation Tax.

Equipment, vans and cars

Items the company keeps and uses, such as computers, machinery and vehicles, are not running costs. Instead the company claims capital allowances. These let it deduct some or all of the cost from its profits.

Annual Investment Allowance: up to £1 million per accounting period on most plant and machinery, deducted in full in the period of purchase. The limit is reduced for shorter periods. Cars do not qualify.
Full expensing: companies only. 100% of the cost of qualifying new and unused plant and machinery bought from 1 April 2023, other than cars.
40% first-year allowance: for new and unused main rate plant and machinery bought on or after 1 January 2026, other than cars. The other 60% is claimed through writing down allowances in later periods.

Vans, lorries and motorcycles do not count as cars for these rules, so they can usually use the allowances above.

Company cars

Cars follow their own rules, based on when they were bought and their CO2 emissions:

New, unused electric or zero-emission cars bought before April 2027 can get a 100% first-year allowance
Cars bought from April 2021 with emissions of 50g/km or less go in the main rate pool, at 14% a year from April 2026 (18% before)
Cars over 50g/km go in the special rate pool, at 6% a year

If a director or employee can use a company car privately, that is a benefit. It has to be reported and taxed on the person who uses it.

Mileage in a director's own car

Where a director or employee uses their own vehicle for business journeys, the company can pay them a mileage allowance. Paid at or below HMRC's approved rates, it does not have to be reported and is not taxed on the person. The rates per business mile from 6 April 2026 are:

Cars and vans: 55p for the first 10,000 miles in the tax year, then 25p
Motorcycles: 24p
Bicycles: 20p

See how the approved mileage rates work.

The car and van rate was 45p before then. Anything paid above the approved amount must be reported to HMRC on form P11D, and tax is due on the extra. Keep a log of each journey, its date, its purpose and the miles driven.

Entertaining and gifts

This is where many claims go wrong. Business entertainment and gifts are not deductible, even when they are a genuine business cost. That covers hospitality for customers, suppliers and other contacts.

Staff entertaining

Entertaining your own staff is an exception. A staff party or an event only for employees can be deducted, as long as it meets the wholly and exclusively test.

The exception does not apply where staff are only there because guests are. HMRC's manual gives a useful example. If an employee takes a customer to a restaurant, the whole bill is business entertainment and none of it is allowable, including the employee's own meal.

For the employees themselves, an annual event such as a Christmas party is free of tax if it is open to all staff and costs £150 or less per person. If the combined cost of annual events goes over £150 per head, they are not all exempt.

Gifts

Gifts to customers are blocked unless every one of these applies:

The gift carries a clear advertisement for the business on the item itself
It is not food, drink, tobacco or a voucher that can be swapped for goods
The total cost of such gifts to that person in the accounting period is no more than £50

Small treats for staff and directors

A trivial benefit, such as a modest birthday present, is tax-free for the employee if it costs £50 or less, is not cash or a cash voucher, and is not a reward for their work or part of their contract. Directors of a close company, one run by 5 or fewer shareholders, are capped at £300 of trivial benefits in a tax year.

Personal spending through the company

Paying for something private through the company does not make it a business cost. GOV.UK says that personal use of business property counts as a benefit, which must be reported, with any tax paid.

For anything used partly privately, note the business share and how you worked it out.

A worked example

This example is made up to show the maths. Imagine a small consultancy company with a draft profit of £45,000 for the year. When the books are checked, two things have been left out.

First, £2,010 of software, insurance and equipment costs were paid by card, but the receipts were never recorded. Second, a director drove 1,800 business miles in their own car and was never paid for it. At 55p a mile, the company can pay them £990.

Together that is £3,000 of allowable cost. Profit falls from £45,000 to £42,000. Both figures sit under £50,000, so the small profits rate of 19% applies. The Corporation Tax bill falls from £8,550 to £7,980, a saving of £570.

Records and deadlines

An expense is only as strong as the evidence behind it. A company must keep records of all money received and spent, along with receipts, invoices, contracts and bank statements. These must be kept for 6 years from the end of the last company financial year they relate to, and sometimes longer.

The key Corporation Tax dates are:

Paying the tax: 9 months and 1 day after the end of the accounting period, for taxable profits up to £1.5 million
Filing the Company Tax Return: 12 months after the end of the accounting period it covers

Common mistakes to avoid

Claiming client meals and event tickets as a deductible cost
Treating dividends as if they were salary
Putting a laptop or van through as a running cost instead of claiming capital allowances
Paying mileage above the approved rate without reporting the extra to HMRC
Card payments sitting in the bank feed with no receipt attached
Private spending mixed in with business costs, with no note of which is which

Most of these happen when costs are sorted months late, and nobody can remember what they were for.

Why up-to-date books protect your claims

Missed receipts are missed deductions. When each bank line is matched to its receipt or invoice as it comes in, costs are coded to the right place from the start. Entertainment is kept apart, equipment goes to the asset register, and gaps are chased while the supplier can still send a copy.