What Counts as a Legitimate Business Expense in the UK?

Running a limited company in the UK gives you plenty of opportunities to reduce your tax bill legally, but only if you understand what HMRC sees as a legitimate business expense. Claim too little and you overpay tax. Claim the wrong things and you risk penalties.

Whether you run an ecommerce store, consultancy, SaaS company, or any other type of small limited business, the basic rule is the same. If you get this right, you keep more profit in your business and stay fully compliant. Effective planning around legitimate expenses is an important part of professional accounting and tax services for UK businesses.

This guide explains what you can claim, what you can’t, and how to use expenses properly to improve tax efficiency, with practical examples for both general UK limited companies and ecommerce sellers using platforms like Amazon and Shopify.

The Core Rule: “Wholly and Exclusively” for Business

For an expense to be tax deductible, it must be incurred wholly and exclusively for the purpose of your business.

In simple terms, the cost must be for your company, not for your personal life.

Common legitimate expenses for most UK limited companies include:

• Office or workspace costs

• Staff wages and subcontractor fees

• Professional fees (accountants, solicitors, consultants)

• Software and subscriptions

• Marketing and advertising

• Business insurance

• Travel for business purposes

• Equipment and tools used in the business

For product-based and ecommerce businesses, this also extends to stock, packaging, shipping, marketplace fees and storage.

If an expense has a mixed personal and business use, only the business portion is allowable. This is where the concept of “duality of purpose” comes in. If a cost has both a genuine business reason and an unavoidable personal benefit, HMRC will usually disallow it completely if the personal element is intrinsic and cannot be separated. For example, everyday clothing is not allowable even if you only wear it for work, because it also fulfils the personal purpose of keeping you warm and decent. However, where the business and personal elements can be clearly identified and split, the business part can still be claimed. A typical example is using a personal mobile phone or home internet for work; if you can reasonably calculate that, say, 60% of the use is for the business, that 60% is allowable. In short, if the personal and business purposes are inseparable, the expense is disallowed in full, but if they can be fairly apportioned, the identifiable business share is tax deductible.

Costs of Running the Business

People and day-to-day running costs are at the heart of most limited businesses, and many of these expenses are fully allowable for tax when they are incurred for business purposes.

Wages and salaries paid to employees are deductible, as are employer’s National Insurance contributions and pension contributions. Payments to subcontractors and freelancers also count as allowable costs, provided they are genuinely for business work and correctly recorded. Professional fees for accountants, bookkeepers, solicitors and other advisers are also allowable where they relate to the running of the business, such as preparing accounts, tax returns, contracts, or commercial advice.

Alongside people costs sit the general overheads needed to operate day to day. This includes things like business insurance, office rent, utilities, phone and internet bills, software subscriptions (such as accounting, ecommerce, CRM or SaaS tools), website hosting, domains, and routine repairs and maintenance of business equipment. Bank charges and payment processing fees from providers like Stripe, PayPal or card terminals are also allowable, as are marketing and advertising costs such as online ads, design work, and promotional materials.

Individually, many of these costs can look small, but together they make up a significant part of your total expenses. Recording them accurately ensures you only pay tax on your true profit and gives you a clearer picture of what it actually costs to run and grow your business.

Stock, Materials and Cost of Sales

If your business sells physical products, the cost of buying or producing those products is an allowable expense. This includes things like supplier invoices for stock, import duty and freight charges, packaging and labelling, and fulfilment or storage fees charged by Amazon FBA or other third-party warehouses. In product-based businesses, these costs make up a large part of overall spending, so getting them recorded correctly is essential. Even small mistakes or omissions can significantly distort your true profit, especially for sellers using fulfilment services and online marketplaces, which in turn affects how much tax you pay and how well you can plan your cash flow and pricing.

Using Your Home for the Business

Many small limited companies start from home.

You cannot use the rent-a-room scheme to charge your company for office space, because that scheme is for letting residential space to another person, not to your own company.

Instead, your company can pay you a reasonable commercial rent for the part of your home it uses. The company gets a Corporation Tax deduction, and you personally declare the rental income but can offset a proportion of household costs such as:

• Mortgage interest or rent

• Council tax

• Utilities

• Home insurance

When done properly, this can be tax efficient and fully compliant but it needs to be structured correctly to avoid unexpected personal tax.

Vehicles and Travel

Travel that is wholly and exclusively for business is allowable, whereas ordinary commuting between your home and your regular place of work is not. For directors of small limited companies, travel planning is particularly important because the way you fund and own a vehicle can dramatically change the tax outcome.

Broadly, there are two main options: the company owns the car, or you own the car personally and claim business mileage from the company.

If the company owns the car and you use it for any private journeys (including commuting), this creates a Benefit in Kind. This means you personally pay income tax on the car benefit and the company pays employer’s National Insurance on it. The amount of tax depends on the car’s list price and CO₂ emissions, which can make traditional petrol or diesel company cars surprisingly expensive from a tax point of view. Electric cars currently attract much lower Benefit in Kind percentages, which is why they are often more tax efficient when provided by the company.

For many owner-managed businesses, especially where private use will be significant, using a personal car and claiming HMRC’s approved mileage rates is simpler and often more efficient. The company pays you a tax-free mileage allowance instead of providing the car itself:

• 45p per mile for the first 10,000 business miles each tax year

• 25p per mile after that

These fixed rates are designed to cover fuel, servicing, insurance, depreciation, and general wear and tear, so you cannot also claim those costs separately. Because the payment is tax-free to you and fully deductible for the company, it avoids Benefit in Kind charges and keeps administration straightforward.

The right choice depends on factors such as your expected business mileage, the type of car you want to drive, and how much private use there will be. Getting this decision right can save thousands in tax each year, which is why it’s an area worth reviewing carefully as your business grows.

Entertainment and Other Grey Areas

Some costs feel business related but are not tax deductible.

Client entertaining, such as taking a customer out for a meal or event, is not an allowable expense for Corporation Tax, even though it is a normal business activity.

Personal clothing is not allowable, even if you only wear it for work, unless it is a recognisable uniform or protective clothing.

Mixed personal and business costs, such as a mobile phone or home internet, must be apportioned so that only the business element is claimed.

Clear records and receipts are essential, especially if HMRC ever asks questions.

How Legitimate Business Expenses Reduce Your Tax

For limited companies, allowable expenses reduce your profits before Corporation Tax.

Corporation Tax is currently:

• 19% on profits up to £50,000

• 25% on profits above £250,000

• With marginal relief between those levels

Every £1 of legitimate expense can save up to 25p in tax for higher-profit companies.

For ecommerce businesses operating at scale, correctly capturing stock costs, marketplace fees and fulfilment charges can make a very large difference to the final tax bill.

Good Records Make Everything Easier

Up-to-date bookkeeping is what turns receipts into real tax savings.

Using proper accounting software like Xero allows you to:

• Categorise expenses correctly

• Attach digital copies of receipts and invoices

• Track VAT on purchases and imports

• Separate business and personal elements of mixed costs

For ecommerce sellers, integrating Amazon, Shopify and other marketplaces into your accounts ensures fees, refunds and payouts are recorded accurately rather than guessed from bank statements.

Final Thoughts

A legitimate business expense is anything your limited company genuinely needs to operate and earn its income, as long as it is not personal.

Getting this right improves cash flow, reduces Corporation Tax and gives you a clearer picture of how your business is really performing.

We bring real commercial experience from years of running and scaling ecommerce and importing businesses ourselves so if you want confidence that your expenses are being claimed correctly and tax efficiently, explore our other guides on the Martlet & Co website and get in touch to see how we can support your business.