Contractor Expenses Claim: What You Can and Can’t Claim

Contractor Expenses Claim: What You Can and Can’t Claim

As a contractor in the UK, keeping track of business expenses is essential for managing your finances efficiently. Depending on how you operate, there are various expenses you may be entitled to claim, reducing your overall tax liability. However, not all expenses qualify for tax relief. HM Revenue and Customs (HMRC) has strict rules stating that expenses must be “wholly and exclusively” for business purposes to be eligible for deductions.

Understanding what you can and cannot claim ensures compliance with tax regulations while maximising your allowable expenses. This guide explains the key expenses contractors can claim and how to maintain proper financial records to avoid issues with HMRC.

What Are Allowable Expenses for Contractors?

Allowable expenses are costs incurred solely for business purposes. Claiming these expenses reduces your taxable profit, which in turn lowers the amount of tax you owe. To qualify, an expense must be directly related to running your business. Keeping accurate records of all expenses is essential, as HMRC may request evidence in case of an audit. Typically, financial records must be kept for at least six years after the financial year ends.

Here are some of the main expenses that contractors can claim:

Accountancy Fees

Hiring an accountant to manage your company accounts is an allowable business expense. However, tax relief is only available if the accountant’s services are related to business finances, not personal tax affairs.

Accommodation Expenses

If you need to stay overnight for business purposes, accommodation costs can be claimed, provided the expense is reasonable. This applies when travelling to a temporary workplace rather than your permanent location.

Charitable Donations

Limited companies can receive tax relief on donations made to registered charities. Donations must be made directly through the company to qualify for tax deductions.

Christmas Party Costs

A limited company can claim tax-free expenses for an annual staff party, such as a Christmas party. However, the total cost must not exceed £150 per person, and all employees must be invited for the expense to be valid.

Company Formation Fees

Setting up a limited company involves certain administrative costs. Once the company is officially running, these expenses can be reclaimed.

Equipment Purchases

Any equipment bought solely for business use qualifies for tax relief. This includes computers, office furniture, software, and other necessary tools required for work. The key condition is that the equipment must be essential for running the business.

Mileage and Travel Expenses

Contractors who use their personal vehicle for business purposes can claim mileage expenses. HMRC sets specific mileage rates depending on the type of vehicle and the distance travelled. Additionally, travel costs such as train tickets, flights, and taxis for business trips are allowable expenses, provided they relate to temporary workplaces.

Pension Contributions

Companies can make pension contributions on behalf of employees, including the contractor-director. Pension contributions receive 100% tax relief and can be made without an upper limit when processed through the company.

Salary Payments

Salaries paid to directors or employees are considered allowable business expenses. This includes National Insurance Contributions (NICs) and PAYE deductions. Structuring salary payments efficiently can help reduce overall tax liabilities.

Telephone and Internet Costs

Business-related telephone calls and internet usage qualify for tax relief. However, if a phone or internet connection is used for both personal and business purposes, only the business-related portion of the cost can be claimed. If the phone contract is in the company’s name and used exclusively for business, it qualifies as a fully deductible expense.

Travel and Subsistence Costs

When travelling to a temporary workplace for business purposes, contractors can claim travel and subsistence expenses. However, if the workplace is deemed a permanent location, travel costs will not be deductible. Temporary workplaces are defined as locations where a contractor works for less than 24 months.

Keeping Proper Financial Records

To support expense claims, contractors must maintain detailed financial records, including invoices, receipts, and bank statements. HMRC requires businesses to keep records for at least six years. If a tax return is submitted late, the record-keeping period may be extended. Having well-organised records helps in case of an audit and ensures compliance with tax regulations.

If there is uncertainty about whether an expense is allowable, seeking advice from a contractor accountant is recommended. Incorrect claims can result in HMRC penalties, so it’s essential to stay informed about current tax rules.

Final Thoughts: Maximising Your Contractor Tax Savings

Understanding contractor expenses can significantly reduce your tax liability and increase your take-home pay. By ensuring that all claims align with HMRC’s guidelines, you can avoid unnecessary tax burdens while optimising your finances. Keeping proper records and seeking professional advice ensures compliance and financial efficiency.

Looking for a Mortgage as a Contractor?

Managing your expenses effectively is not just important for tax savings—it also plays a crucial role when applying for a mortgage. Lenders assess financial records to determine affordability, and having a well-structured income report can improve your chances of securing a mortgage.

At Mortgage-Tek, we specialise in helping contractors navigate mortgage applications without traditional lending barriers. Whether you work through a limited company or as a self-employed contractor, we help you secure competitive mortgage deals based on your contract income.

Get in touch with Mortgage-Tek today to simplify your mortgage journey and find the best mortgage deal for your situation!