When you're running a Limited company, understanding what you can and can’t claim as business expenses is key to keeping your tax bill accurate and staying on the right side of HMRC. While it’s tempting to try and offset as much as possible against your profits, not all expenses are fair game.

Some costs are considered disallowable expenses for Corporation Tax, meaning they need to be added back when working out your taxable profits.

It is important that you know exactly what to avoid (or at least not rely on for tax relief).

What are disallowable expenses?

Disallowable expenses are costs that your Limited company might incur during its day-to-day operations, but which cannot be deducted when working out your taxable profits for Corporation Tax purposes. In other words, even if you've paid for something through the company and recorded it in your business accounts, it doesn’t necessarily mean HMRC will let you use it to reduce your tax bill.

When preparing your company’s annual accounts, you’ll list all business expenses to show your profit or loss for the year. However, when it comes to your Corporation Tax return, some of those costs need to be added back in because HMRC doesn't consider them valid for tax relief. These are the disallowable expenses.

So what makes an expense disallowable? HMRC follows a key principle: expenses must be incurred "wholly and exclusively" for the purpose of running the business. This means that if an expense is even partly personal, or not directly related to your company’s trading activities, it won’t be allowed for tax purposes.

Understanding which expenses fall into this category is important. Not only does it help you stay compliant, but it also ensures your accounts are accurate, your tax returns are correct, and you don’t end up underpaying (or overpaying) tax.

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Common disallowable expenses 

Here’s a handy list of expenses that HMRC typically sees as disallowable:

1. Client entertainment

If you are taking a client out for lunch, buying drinks, or treating them to event tickets, then that might be great for relationship building, but it’s not tax-deductible. HMRC draws a hard line between entertaining clients and actual business operations.

Yes, you can claim staff entertainment (like a team Christmas party up to £150 per head), but not wining and dining your clients.

2. Fines and penalties

Parking fines, speeding tickets, and HMRC penalties aren't tax-deductible. Even if you incur them while working, they’re not allowable for Corporation Tax purposes. HMRC sees them as avoidable and not a legitimate cost of doing business.

3. Gifts

Business gifts are only allowable in very limited situations. If you give a branded gift (with your company logo) that costs less than £50 and isn’t food, drink, or tobacco, it might be allowed.

But in general, most gifts especially to clients won’t be deductible, so be mindful of this. 

4. Donations

Charitable donations made by your company aren’t always disallowable but they’re not treated as regular business expenses either. Donations to registered charities can reduce your taxable profit, but only under specific rules.

Donations to political parties or non-charity groups are disallowable.

5. Depreciation

You might record depreciation on your company’s equipment in your accounts, but for tax purposes, it’s disallowable. Instead, you may be able to claim capital allowances, which are HMRC’s approved way of deducting the cost of capital assets.

6. Non-Business use proportion

If you use an asset or service for both business and personal use (like your mobile phone), you can only claim the business portion. The personal part is disallowable.

It’s important to keep clear records or a usage breakdown to avoid overclaiming.

However, this is not always true for vehicles. In most cases, the full amount for vehicle usage is still an allowance expense for Corporation Tax. Though it will incur a taxable benefit on a P11D for an individual.

7. Excessive salaries to family members

Paying your spouse or children through the business is fine if they actually work for the company and the salary is reasonable for the role. If not, HMRC may disallow all or part of the payment.

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Other expenses to keep an eye on

There are a few extra expense categories that often catch business owners off guard. They might seem like legitimate business costs at first glance, but they’re either fully or partially disallowable, so it’s worth taking a closer look.

Legal fees for buying or selling a business

Legal and professional fees are generally allowable if they relate directly to running your business. For example, contracts, employment matters, or debt recovery. But if you incur legal fees as part of buying or selling a company, HMRC typically treats these as capital in nature, not day-to-day business running costs. As a result, they’re often disallowable for Corporation Tax purposes.

Costs incurred before the company was officially formed

You might start incurring expenses before your company is officially registered, such as setting up a website, buying equipment, or hiring a consultant. While some of these pre-incorporation expenses may be claimed later if they meet certain conditions, many are not allowable, particularly if they were paid for personally or fall outside HMRC's timing or purpose rules. Always check what qualifies before including early costs in your accounts.

Personal items accidentally run through the business account

It happens: a personal Amazon order on the company card, or a family meal paid from the business account. If these personal expenses end up in your business records, they need to be marked clearly and added back when calculating taxable profits. HMRC won’t allow deductions for anything that doesn’t directly benefit the company, even if it was unintentional.
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How to stay on track

Avoiding issues with disallowable expenses mostly comes down to good record keeping and a clear separation between business and personal finances. Here are a few practical tips to help you stay on the right path:

• Use separate bank accounts for your business and personal spending. This makes it easier to track and explain each transaction.
  
  
• Keep detailed records and receipts, including notes on the purpose of the expense and how it relates to your business.
  
  
• Review your expenses regularly to catch anything that may be borderline or disallowable, rather than waiting until year-end.
  
  
• Ask for help when needed. A qualified accountant can guide you through the rules and help ensure you're only claiming what you're entitled to.

Just because something goes through your business bank account doesn’t mean it’s automatically tax-deductible. HMRC looks at the purpose and nature of the expense, not just where it was paid from. Staying organised and informed can save you time, stress, and money in the long run.
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Keeping your business finances on the right track

Getting to grips with disallowable expenses is an essential part of running a Limited company. It helps ensure your tax returns are accurate, your accounts reflect the true state of your business, and you stay fully compliant with HMRC rules.

While it might seem like a long list of what not to do, having clarity on these rules puts you in control. You’ll avoid accidental overclaims, reduce the risk of penalties, and build a strong foundation for sound financial management.

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