Contractor Expenses: What You Can and Can't Claim (2026/27)

Expenses are one of the most misunderstood parts of running a contracting company. Some contractors under-claim out of caution and pay more corporation tax than they need to; others over-claim on the strength of pub advice and expose themselves to penalties. The truth sits in the legislation, and it's more knowable than the myths suggest.

This guide covers the two tests that decide how a cost is treated, the expenses that matter most to contractors, the two changes that took effect in April 2026, and the ones HMRC will reliably disallow.

The two tests that decide everything

There are two tests, and the common mistake is to treat them as alternatives. They are not — they answer different questions, and a cost can pass one and fail the other.

• Is it deductible for the company? The test is whether the cost was incurred wholly and exclusively for the purposes of the trade (CTA 2009 s54). This applies to everything the company bears — accountancy fees, software, equipment, insurance, and anything it reimburses you for, because a reimbursement is part of the cost of employing you.
• Is the reimbursement tax-free in your hands? The test is whether you incurred the cost wholly, exclusively and necessarily in the performance of your duties (ITEPA 2003 s336, with specific rules for travel at s337–338). That extra word — necessarily — is a higher bar.

Why the distinction matters: a reimbursement that fails the second test is usually still deductible for the company. It simply becomes a taxable benefit on you, reportable and subject to Class 1A National Insurance, which normally costs more than the corporation tax it saves. So the question is rarely "can the company claim this" — it is "will this land on my P11D."

Two practical consequences follow. First, dual-purpose costs generally fail: if something has a meaningful private benefit as well as a business one (everyday clothing, a phone contract in your own name used for personal calls), it usually isn't allowable, or must be apportioned. Second, wherever possible, it's cleaner for the company to contract and pay directly rather than you paying personally and reclaiming — a company mobile contract, for example, is treated far more generously than reimbursing your personal bill. That said, from 6 April 2026 the gap narrowed for a specific group of costs: see the section on reimbursed benefits below.

The expenses that matter most to contractors

1. Business travel — and the 24-month rule

Travel from home to a temporary workplace is an allowable business journey; travel to a permanent workplace (ordinary commuting) is not. For contractors this hinges on one rule that catches people out more than any other.

Where travel is allowable, you can claim:

• Mileage in your own car at HMRC's approved rates (AMAPs) — 55p per mile for the first 10,000 business miles in the tax year, then 25p thereafter (24p for motorcycles, 20p for bicycles, both uncapped). The car and van rate rose from 45p to 55p for 2026/27, the first change since 2011/12.
• Passenger payments — an extra 5p per mile per passenger where you carry a fellow employee on the same business journey. Relevant if there are two of you on the payroll.
• Public transport, parking and congestion/clean-air charges for business journeys (parking fines are never allowable).
• Subsistence — food and drink on a qualifying business journey, and accommodation if you stay away overnight. Rather than guessing at what counts as "reasonable," you can use HMRC's benchmark scale rates: £5 for a qualifying journey over 5 hours, £10 over 10 hours, and £25 over 15 hours where travel continues beyond 8pm. Actual receipted cost is the alternative, and is often higher.

Don't confuse two regimes. The rates above apply to your own vehicle. If the company owns or leases the car, AMAPs do not apply at all — fuel is dealt with through HMRC's quarterly Advisory Fuel Rates, and the car itself creates a benefit-in-kind. See the section on company cars below before going anywhere near this.

Note that if a specific engagement is caught by IR35 (inside), travel between home and that client's site is generally not claimable against the deemed employment income — another reason IR35 status has a real cash impact. See our IR35 guide.

2. Use of home as an office

The rules here changed on 6 April 2026. Tax relief for homeworking costs you pay yourself and are not reimbursed for was abolished at the Autumn Budget 2025 — so the old route of claiming £6 a week as a deduction on your own tax return is no longer available.

What still works, and what most one-director companies should be using, is reimbursement by the company. That was unaffected by the change:

• The flat rate — £6 per week (£312 a year), paid by the company to you as a tax-free reimbursement of household costs, with no receipts or calculations required. Simple, safe, and enough for most. The exemption is ITEPA 2003 s316A, and it carries one condition worth knowing: there must be homeworking arrangements — an understanding between you and the company that you regularly perform some of your duties at home. For a sole director that is easy to satisfy, but record it in a board minute rather than assuming it. HMRC's stated reason for abolishing the employee-side relief was that over half the claims it checked were ineligible, so attention is likely to shift to the reimbursement side.
• A proportion of actual costs — a share of heating, electricity, and (if relevant) metered water, based on the number of rooms used for business and the time they're used, again reimbursed by the company against evidence. This can be worth more if you genuinely work from home a lot, but keep the calculation reasonable and documented. Avoid putting a fixed proportion of mortgage interest or council tax through the company, which brings complications (and potential capital gains and business-rates issues) that rarely justify the saving.

3. Equipment, computers and capital allowances

Laptops, monitors, phones, office furniture and other equipment bought by the company for business use are allowable. Because these are capital items rather than day-to-day running costs, they're relieved through capital allowances — but the Annual Investment Allowance gives 100% relief on qualifying plant and machinery in the year of purchase (up to £1,000,000, far above anything a typical contractor spends), so in practice the full cost usually comes off profit straight away.

If an asset has some private use, the business proportion is what's relievable. A dedicated work laptop with incidental private use is generally fine.

Two things the AIA does not cover. Cars are specifically excluded — they get writing-down allowances instead, at rates depending on emissions, which is one of several reasons buying a car through the company rarely works out (see below). And for completeness, companies also have full expensing: unlimited 100% relief on qualifying new main-rate plant and machinery. It matters for businesses spending beyond £1,000,000 a year and is academic for most contractors, but it is why you may see it mentioned elsewhere.

4. Pension contributions

Employer pension contributions made by your company into your pension are one of the most powerful tools available to a contractor. Paid directly from the company, they're normally an allowable business expense (deductible for corporation tax under the wholly-and-exclusively test), they avoid the salary/dividend tax layer entirely, and they don't attract National Insurance.

5. Mobile phone and broadband

• Mobile phone: if the contract is in the company's name, the company can provide one phone per employee with no taxable benefit, even where there's private use. If the contract is in your name and you reclaim, you can only claim the cost of identifiable business calls — much less generous. Put the contract in the company's name.
• Home broadband: if you already pay for broadband personally, there's usually no additional allowable cost (you'd have it anyway). A separate business line, or a genuinely incremental cost, can be claimed.

6. Training and professional development

Training that maintains or updates skills you already use in the business is normally allowable (a developer's course in a newer version of a language they already work in, say). Training to acquire a genuinely new skill or trade is more contentious and can be challenged as capital or non-business in nature. The closer the course is to your existing service, the safer the claim.

That covers the company's deduction. The reason company-paid training is also tax-free to you, rather than a benefit-in-kind, is a separate exemption for work-related training at ITEPA 2003 s250. It is broad — covering course fees and associated travel and materials — but it hinges on the training relating to your current or a prospective role within the business, which is another reason the "updates existing skills" framing above is the safe side of the line.

7. Professional subscriptions and business insurance

• Subscriptions to professional bodies on HMRC's approved list (List 3) that are relevant to your work are allowable. General-interest memberships are not.
• Business insurance — professional indemnity, public liability, and similar cover required to trade or win contracts — is allowable. IR35/tax-enquiry insurance is likewise a business cost.

8. Trivial benefits and the staff event

Two small but genuinely useful reliefs that many contractors forget:

• Trivial benefits: the company can give you a benefit costing £50 or less (not cash or a cash voucher, not a reward for work) free of tax — for example a gift. For directors of a close company there's an annual cap of £300 across the year.
• Annual staff event: up to £150 per head, per year (VAT inclusive) on an annual function such as a Christmas meal is exempt, provided it's genuinely an annual event open to staff generally. Go a penny over £150 and the whole amount becomes taxable, not just the excess. It is widely accepted that a one-person company can use this, since an event open to your only employee is open to all of them — but HMRC's guidance is framed around functions available to employees generally, so keep it modest and documented rather than treating it as a certainty.

9. Company cars — read this before you buy one

This is the most expensive mistake available to a contractor, and it is worth being blunt about. Putting a car through the company does get the company relief, but it creates a benefit-in-kind on you, calculated as a percentage of the car's list price rather than what the company actually paid, and taxed at your marginal rate every year you have it. The company also pays Class 1A National Insurance at 15% on the same benefit. For a conventional petrol or diesel car the benefit charge routinely exceeds the tax saved.

Three further points. Cars do not qualify for the Annual Investment Allowance, so relief comes slowly through writing-down allowances. Fuel provided for private use creates a separate and often punitive charge. And VAT on a car purchase is generally blocked entirely unless there is genuinely no private use at all, which is close to impossible to sustain for a contractor's only car.

The exception is electric vehicles, where the benefit percentage is low enough that the arithmetic can work. The appropriate percentage is 4% for 2026/27, up from 3% in 2025/26, and is legislated to rise to 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30. Ultra-low emission vehicles emitting under 75g/km also rise by a percentage point for 2026/27. An EV through the company is a genuinely reasonable thing to model; anything else usually is not. Either way, model it before you commit rather than afterwards.

10. Pre-trading expenditure

Easy to miss, and it only comes up once. Costs you incurred before the company started trading — up to seven years before — are treated as if incurred on the first day of trade, provided they would have been allowable had the company been trading at the time. That covers the company formation-adjacent costs, the laptop you bought a month before your first contract, the professional advice you took while deciding whether to incorporate. Dig out those receipts when you set up your bookkeeping; most contractors write off their pre-incorporation spend simply because nobody told them not to.

What HMRC will reliably disallow

These are the recurring problem areas. Claiming them either reduces relief you're not entitled to or creates a benefit-in-kind you'll have to report:

• Client entertaining. Entertaining clients or prospects is not deductible for corporation tax (it's added back), and the VAT is not reclaimable. Staff entertaining is treated differently for corporation tax and benefit purposes — but see the VAT warning attached to the £150 event above before assuming the VAT follows.
• Everyday clothing. A suit or smart clothes worn for work fail the test because they also serve an everyday private purpose — even if you'd never wear them otherwise. Only genuine protective clothing or a branded uniform is allowable.
• Ordinary commuting to a permanent workplace, and any travel to a site once the 24-month rule bites.
• Dual-purpose costs where the private element isn't incidental — the personal-name phone contract, a gym membership, ordinary prescription glasses for general use. Note that eye tests and corrective appliances required for display-screen work are a genuine exemption, and from 6 April 2026 that exemption covers reimbursement as well as direct provision — so this one has moved in your favour.
• Non-commercial payments to family. A salary to a spouse is allowable only if it reflects genuine work at a commercial rate; HMRC challenges token or inflated amounts.

A note on VAT

Whether you can reclaim the VAT on an expense is a separate question from whether it's allowable for corporation tax. On the standard VAT scheme you reclaim input VAT on genuine business purchases (with a valid VAT invoice), but there are specific blocks — most notably you can't reclaim VAT on client entertaining, on most company cars, or on entertaining that involves only the directors of the company. On the Flat Rate Scheme you generally can't reclaim input VAT at all (except certain capital assets over £2,000), which is one of the trade-offs we weigh when advising on schemes — see our VAT guide.

Keep the records — it's the cheap part

An expense is only as good as your ability to evidence it. Keep VAT invoices and receipts (photographing them into your bookkeeping software as you go is the habit that matters — FreeAgent, which we expect to use with clients, handles this from the mobile app), record the business purpose where it isn't obvious, and log business mileage with dates, destinations and the reason for each journey. HMRC can ask you to substantiate claims years later, and companies must keep records for at least six years from the end of the accounting period.

Six years is the retention rule; the exposure period is not the same thing. HMRC can normally assess up to four years after the end of a tax year, extending to six years where a loss of tax was brought about carelessly and twenty years where it was deliberate. That range is the real reason to keep contemporaneous notes of business purpose — the further back an enquiry reaches, the less anyone remembers, and a one-line note written at the time is worth more than a reconstruction three years later. Good habits here cost minutes and remove almost all of the risk.

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