Contractor Guide to Claim Expenses

If you are looking for the best Contractor accountants then, you are at right place. Explore now the elaboration of Contractor expenses with an example.

What is a Business Expense?

As a Limited Company contractor costs that are incurred wholly and exclusively for your business can be claimed as business expenses, which means that you will receive tax relief on these costs. Claiming business expenses correctly could reduce your tax bill so it is worth taking the time to understand what you can and cannot claim. Our expenses guide for contractors details how expenses can affect your tax bill, examples of what is and is not classed as an expense and the process involved in making a claim.

Common contractor expenses

For more information on whether you are able to claim individual costs as an expense you may find our individual expense pages useful:

  • 24 Month Rule for travel
  • Childcare costs
  • Clothing
  • Company Assets
  • Home Office
  • Pension Contributions
  • Training Costs
  • Travel Expenses

How can expenses affect my tax bill?

Claiming business expenses correctly could affect your tax bill. Business expenses are deducted from your company profits and as you only incur tax on your profits, if your profits decrease then your tax bill could decrease as well. Please note that expenses work on a case by case basis so it is always a good idea to speak to an accountant for information about your individual circumstances.
Example:
If you earn £5,000 a month and you do not have any expenses then you must pay tax on the full £5,000. However, if you were to earn £5,000 in a month and incur £1,000 in business expenses, your taxable profits would be £4,000. This is because your business expenses are deducted from your total earnings to leave your taxable profits.
This example does not factor in VAT, PAYE, dividends and the flat rate VAT scheme. It is therefore best to speak to your accountant for a more detailed account of how claiming expenses could affect you.
As a contractor what costs could I claim as a business expense?
HMRC define business expenses as costs which are incurred are wholly and exclusively for your business. As a limited company contractor operating outside of IR35 you may be able to claim costs if they fit this description. See below for some examples of business expenses:

  • Accountancy Fees – As a limited company contractor you may wish to hire an accountant to take care of your personal and business taxation requirements. As this cost is directly related to the running of your business the cost could be claimed as a business expense. Other professional fees such as legal fees could also be claimed.
  • Business Travel – If you are required to travel for your business then you are able to claim the cost as a business expense. Contractors can claim mileage of 45p per mile for the first 10,000 miles traveled in a financial year and 25p per mile thereafter. This amount covers fuel and any wear and tear on your car. If you take a passenger in the car with you then you are able to claim an extra 5p per mile. If you travel via public transport you are able to claim the cost as an expense as long as you keep the receipt. Toll fees, congestion charges and parking costs are also able to be claimed as expenses.
  • Accommodation – If your business requires you to stay away from your permanent address then the cost could be claimed as an expense. You may also be able to claim for meals and a small amount per day for personal items.
  • Mobile Phone Bill – If you use your phone entirely for business related use then you are able to expense your entire phone bill. However, most contractors will use their phone for both business and personal use and in this case only the minutes and texts that have been used for business purposes are able to be expensed.
  • Training Courses – If the training course in question is wholly and exclusively for business purposes then the cost could be expensed.
  • Stationery – Branded stationery such as letter heads, envelopes, pens and other items are able to be claimed as expenses if they are used solely for business use.
  • Clothing – As a general rule clothing that could be used as part of your everyday wardrobe such as business suit or business dress cannot be claimed as an expense, even if you only use them for work. Clothing that is able to be claimed as a business expense includes branded uniform items and protective work clothing.

What costs cannot be claimed as an expense?

Costs that are not wholly and exclusively for the use of your business are not classed business expenses. Some common examples of costs that you are not able to claim are most medical treatment costs, client entertainment, childcare, gym membership, parking fines and speeding tickets (even if they are incurred on business trips).

How do I claim business costs as expenses?

As a limited company contractor claiming expenses it is incredibly simple. If you pay for the expense yourself then you will need to complete a bank transfer or write yourself a cheque from your limited company bank account to your personal bank account. If the expense cost is taken directly from the company bank account then each amount must be recorded so that you can accurately calculate your profits.

Business expenses paid personally

If you incur a business expense and pay for the cost personally you can reimburse the amount from your limited company profits.

Business expenses paid directly from your company

If you pay for business expense costs directly from your limited company bank account then each cost needs to be recorded as an expense.Certain expenses such as company pension contributions should always be made from the company bank account to avoid any further tax implications.

Frequently asked expenses questions

Can I claim the cost of glasses?

The provision of an eye test is allowable as a business expense to employees. As with all expenses if you can justify the cost as being wholly and exclusively for business purposes then it can be claimed (normally the glasses must be for VDU work only), though this could be hard to justify and in most cases are seen as being for a dual purpose.

Do I need to keep receipts?

HMRC require you to keep hold of all paperwork, including receipts as these form your business records. There are different timescales relating to different taxes so we would advise holding onto everything for a minimum of 7 years.

How can I make pension contributions?

You can either make personal pension contributions or employer contributions from your company and depending on your current circumstances each method could be advantageous to you from a tax perspective.
Pension Contributions
Whilst there are a wealth of pension products available for those who want to invest their money in their futures, advice on which of these should be sought from someone who specialises in this area. However, if you want advice on the tax situation surrounding pension contributions and the best way to structure them to ensure that you are getting the tax relief you are entitled to, then an accountant who specialises in self employment, contracting and running your own business is ideal.
If you want to make contributions to a pension fund, then there are two ways doing so: you can make them directly as personal payments or through your company. There are tax advantages to both, so which one works best for you will depend on your circumstances.
Personal Pension Contributions
If you want to transfer some of your personal fund into a pension scheme, then you will be entitled to personal tax relief. Pension providers can reclaim the basic rate of tax on the contributions that you make and this will be added to your fund, meaning that an £80 payment will be worth £100. If you are a higher or additional rate tax payer then tax relief will also be available up to the top rate of tax that you pay.
If you want to benefit from tax relief on personal pension contributions, then the maximum you can invest is 100 per cent of your earned income from either employment or self employment, so long as this is below the annual allowance which is £40,000 in 2015/16. If you do not earn enough to pay income tax, then you can still receive tax relief on pension contributions up to a maximum of £3,600, meaning that you contribute £2,880 and the government tops it up to £3,600. If you pay in more than this amount then you will not be entitled to tax relief on the excess.
Example: If your gross annual salary is £10,000, then you can claim tax relief on up to £8,000 of pension contributions, as the tax reclaimed on this sum by your pension provider will total £10,000.
Company Pension Contributions
Pension contributions made by a company are deductible for corporation tax purposes, so long as you can demonstrate that they are wholly and exclusively for business purposes. Whist the guidance on what this means in practice isn’t definitive, in general if a remuneration package is reasonable and doesn’t result in an overall tax loss for the company, then the contributions can be deducted.
Annual Allowances can be carried forward from the previous three years if they have not been used, meaning that up to £190,000 can be contributed in 2015/16 so long as the following criteria are met; you must have been in a UK registered pension for the years in which your allowance was unused, and you must have earned at least as much as you want to contribute in the tax year in which the payment is to be made.
Deciding Factors
If you aren’t sure whether you should be contributing to a pension on a personal basis or through your company, then it could help to consider some of the following:

  • Tax relief on personal contributions is limited to 100 per cent of an individuals salary or other earned income, meaning that any gross contributions, which exceed this amount will not normally be tax efficient.
  • If your employment status means that IR35 applies to you, then pension contributions made on behalf of a company will always be more tax efficient as they are considered a qualifying expense under the applicable salary rules. This means that both employee’s and employer’s National Insurance Contributions are saved which would not be the case if personal contributions are made.
  • Company contributions are safe from IR35. This means that if you were operating outside IR35, but were subject to an HMRC investigation which resulted in a decision that you should in fact have been operating inside IR35, then any pension contributions would be deducted from the salary due.
  • Both annual and lifetime limits are imposed on the pension contributions that can be made. The annual limit is £40,000 in 2015/16 and the lifetime limit is £1,250,000 so if you want to contribute more than that then the excess will be liable for tax.

Pension Input Period
Although some pension providers will use the tax year as the pension input year, usually an individual’s annual allowance is based on the tax year in which their pension contributions begin, meaning that the input period usually ends on the anniversary of the date of the first contribution.
To Conclude
For most people, personal contributions up the level of their gross salary and then company contributions for any excess is considered the most tax efficient way of funding a pension. However, many people prefer the administrative simplicity of solely making company contributions, especially given the relatively low value of the contributions that can be made when a lower salary is paid.

Can I pay my spouse a salary?

You can pay your partner a salary, however, this can be difficult to justify to HMRC. If your partner was to be carrying out general administration duties then HMRC would not see this as taking more than a couple of hours per month paid at an appropriate hourly rate. If your partner was working through the business and generating income then by all means this would be fine, however, this would incur an additional fee from ourselves for the salary to be issued.

I have purchased some new clothing to wear while working. Can I reclaim the cost of this as a business expense?

The cost of everyday corporate clothing such as shirts, blouses, trousers, skirts and suits would not normally be reclaimable as an expense. The only exception to this might be if the clothing was uniform or protective clothing. The clothing cannot be claimed as a uniform simply because all workers are required the wear this type of clothing, the test would be if someone wearing the clothing would be recognizable in the street as wearing a uniform, such as a fire fighter or a nurse. If such work clothing were to be provided, it would constitute a benefit in kind and as such would be subject to additional income tax and NICs.

I want to claim for some furniture and for the re-decoration of my home office; I trust that this is acceptable?

Claiming furniture for your home office is an acceptable expense, however, there are certain criteria that would have to be met:

  • It must first and foremost be relevant and its cost not excessive for its purpose as office furniture – furniture up to a value of £300 is unlikely to be questioned in an HMRC investigation.
  • The personal use of the furniture must be insignificant – when measuring significance, the frequency of the furniture’s use for work purposes should be considered, if personal use is anything more than insignificant a benefit in kind would arise
  • In the event of an investigation from the HMRC, you must be able to justify that the personal use is insignificant. If you are not confident that this justification can be met, we would advise that you do not claim for the furniture.