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What expenses can I claim as a limited company contractor?

Umbrella companies vs. PAYE

 

On the face of it, there might seem like little obvious difference between working under an umbrella company and paying PAYE (Pay As You Earn) income tax via an agency payroll.

But the repercussions for your financial circumstances can be significant, so it's worth taking the time to learn a little more about the differences between umbrella companies and PAYE.

For example, you could be missing out on tax-deductible pension contributions, the ability to claim back your business expenses, and the advantages of being in continuous employment on paper.

Working as a limited company contractor enables you to claim certain tax-deductible business expenses that might not normally be available to self-employed individuals.

 

Limited company expenses mean that if you have to spend money in order to carry out your business day-to-day, you quite rightly do not pay the tax on those incurred costs. However, it is not just as simple as deducting every penny you spend from your gross earnings.

 

In this guide, we will look at some of the limited company allowable expenses HMRC accept, and how these can help you to reduce the amount of tax you pay on your gross income when working as a limited company contractor.

 

We'll also go into more detail about the Primis Limited Companies Payroll Solution, which enables individual contractors to operate as a limited company in order to benefit from this access to tax-deductible operating expenses.

What is a limited company contractor?

When you first start out as a contractor, you normally register as a self-employed individual. This requires you to file tax returns and pay income tax and national insurance retrospectively from your gross revenues.

 

Operating as a limited company contractor turns you from an individual into a company for tax purposes. This is often referred to by the acronym PSC, which stands for Personal Service Company, when it concerns an individual limited company contractor.

 

You can claim the kinds of operating expenses that business entities are entitled to, pay tax as you go along instead of facing a lump sum tax bill each time you self-assess, and may also be able to limit your personal liability with respect to your business finances and any legal issues that arise.

 

Setting up as a limited company contractor is a decision that is often driven by the amount of income tax you pay, and for most individuals there is a 'tipping point' where it becomes economically sensible to operate as a business instead of as a self-employed individual.

 

But many contractors make the decision based on other elements of the limited company payroll service, such as the access to mobile account management, weekly or monthly invoicing and fee payments, and the easier IR35 compliance it offers.

What expenses can you claim?

There is no official definitive list of limited company allowable expenses HMRC will accept without question - instead there is a general definition that allows for the deduction of expenses incurred "wholly and exclusively for the purposes of trade".

 

HMRC deems the following expense categories as 'incidental benefits' and has published specific guidance on such expenses:

 

Accommodation

 

If you have dedicated business premises (including serviced office space) you can claim the cost of your rent, service charges and maintenance.

 

If you work from home, you may still be able to claim a percentage of your living costs, to cover any expenses incurred due to your business, rather than your personal life. HMRC permits a fixed-rate deduction of £6 per week if you would prefer to avoid making this lengthy and detailed calculation.

 

Accountancy Fees

 

Accountants' fees charged to your business are normally tax-deductible, including preparing your payroll, annual accounts and VAT returns.

 

Be aware that if you complete a self-assessment tax return as a limited company director, you may not be able to claim any related fees, because this pertains to you as an individual rather than to your company.

 

Business Insurance

 

If your business requires you to hold insurance policies such as professional indemnity, employer's liability and public liability, you can claim the premiums paid on those policies as business expenses.

 

Finance Costs

 

If your company is in any kind of debt - such as a business account overdraft, credit cards or business loans - you can normally tax-deduct any interest payable on those loans.

 

You may also be able to claim back any transaction fees charged on your business bank account, so that although you still have to pay for banking services, you do not also get taxed on those fees.

 

Mileage and Transport

 

Transport costs are quite possibly the most commonly claimed expense among limited company contractors, as it's easy to document the fuel costs (or public transport ticket prices) when travelling as part of your job.

 

You can only claim for travel to 'temporary' places of work - if you expect to work at the same location for more than two years, you cannot claim a mileage allowance for your travel to and from the site, unless you spend less than 40% of your working week there.

 

HMRC set a standard mileage rate which is supposed to cover all motoring costs, including services and insurance, so there's usually no option to claim those other automotive expenses separately.

 

Pensions

 

Your limited company can claim tax relief on the full amount of any premiums paid into your pension plan, up to an annual limit of around £60,000 (subject to change).

 

This makes pension contributions even more tax-efficient, so if you work as a limited company contractor, it's worth being aware of this and how it can help you save towards a more comfortable retirement.

 

Professional Memberships

 

Professional memberships (e.g. of trade associations and professional societies) are a permitted business expense as they are a reasonable way for companies to network and self-promote.

 

You can claim tax relief on membership fees, providing the membership is related to your business. For example, gym memberships would not normally be an allowed expense if provided as a benefit to employees or to yourself.

 

Salaries

 

Legitimate salaries paid to employees can be claimed as a deduction, along with any employer National Insurance Contributions (NICs).

 

Salaries should be no higher than a reasonable market rate - you can't, for example, hire a friend or relative on an inflated salary and claim the full amount as a business expense.

 

Telephone Bills

 

Phone and internet costs incurred under contracts in the company's name can be claimed as expenses. If your contracts are in your own name as an individual, you will need to document how much of the cost was incurred due to business use.

 

Additional Limited Company Contractor Allowable Expenses

 

Some of the further examples of limited company contractor costs HMRC are very likely to accept include:

 

  • Equipment purchased for the purpose of running your business

  • Marketing costs, often including website and social media marketing expenses

  • Safety clothing and PPE (but not everyday clothes like business suits)

  • Training that reinforces your current role (not training for a new role)

 

It's a long list and it's not exhaustive, but it starts to build up a picture of the kinds of costs that represent HMRC-allowable business expenses for contractors working via limited companies, which you can use as a basis to determine whether any equivalent expense is deductible or not.

Primis Limited Companies Payroll Solution

The Primis Limited Companies Payroll Solution is a way to run your business on your own terms, with control over the work you do, access to online and mobile accounting, and more efficient personal tax planning including the ability to tax-deduct your allowable business expenses.

 

As you will be operating as a contractor Personal Service Company, we refer to this solution as Limited Company (PSC) and you can compare it with our other solutions in the Primis Contractor Hub.

 

Primis Limited Company (PSC) contractors get:

 

  • 24/7 access to purpose-built mobile-friendly online accounting software

  • Professional support available 8am-8pm

  • Same-day advances and access to Faster Payments

  • SMS alerts when your payments are processed

  • Choice of weekly or monthly invoicing and fee payments

 

Payments are made directly into your business account and - crucially for contractors in light of the increasingly complex rules - we make sure to comply with your IR35 assignment status determination.

 

With over 20 years of experience providing payroll solutions for contractors, our customer support team is on-hand to help with issues like IR35 compliance and business expenses claims, so you don't have to feel alone when it comes to your contractor PSC accounts.

 

Find out more in our Limited Company (PSC) Key Information Document or get in touch using the message form or details on our Contact Us page, and start claiming back your business expenses for the costs you incur during your work as a contractor.

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