Allowable Expenses for Micro Companies UK | Save More Tax Legally

If you run a micro entity company in the UK, knowing which expenses you can claim against your tax bill could save you hundreds, sometimes thousands, of pounds every year. In short, allowable expenses for micro entity companies are the day-to-day costs of running your business that HMRC lets you deduct from your income before calculating how much Corporation Tax you owe. The lower your taxable profit, the less tax you pay. This guide walks you through everything you need to know, in plain language, with no jargon.

What is a Micro Entity Company in the UK?

Before we get into expenses, it helps to know where you stand. Under the Companies Act 2006, your company qualifies as a micro entity if it meets at least two of the following three conditions:

• Annual turnover of no more than £1M
• Balance sheet total of no more than £500,000
• No more than 10 employees

Micro entity companies can file simplified, shorter accounts at Companies House, which reduces their admin burden. But when it comes to Corporation Tax, HMRC still expects you to file a full Company Tax Return (CT600) and claim only the expenses that are genuinely "wholly and exclusively" for business purposes. That phrase is important, and we will come back to it.

What are Allowable Expenses for a Limited Company?

Allowable expenses, sometimes called "deductible expenses", are costs your company has incurred that HMRC permits you to subtract from your company's gross income. The result is your taxable profit, and that is what your Corporation Tax bill is based on.

The golden rule from HMRC is this: an expense is allowable if it was incurred wholly and exclusively for the purposes of the business. If an expense has a personal element to it, you may only be able to claim a portion, or nothing at all.

For micro entity companies, this matters just as much as it does for larger businesses. You are still subject to the same Corporation Tax rules.

What Expenses Can You Deduct for a Small Business?

Here is a breakdown of the most common categories of allowable expenses for micro entities and small limited companies.

Can You Claim Staff and Director Costs?

Yes. Salaries, wages, bonuses, and employer National Insurance Contributions (NICs) are all allowable. If you are a director of your own micro entity company and you pay yourself a salary through the PAYE system, that salary is a deductible expense for the company.

Pension contributions made by the company into an employee's or director's pension scheme are also allowable, provided they are paid before the end of the accounting period and are commercially reasonable.

You can also deduct costs like:

• Recruitment fees
• Staff training that is relevant to their current role
• Employee benefits (some may have a National Insurance or Benefit in Kind implication)

Are Office and Premises Costs Allowable?

Yes. If your company rents office space, the rent is fully deductible. Other allowable premises costs include:

• Business rates
• Water, gas, and electricity for the business premises
• Building insurance for business property
• Maintenance and repairs (but not improvements, see below)
• Office cleaning costs
• Security costs

One important distinction: repairs are allowable, but capital improvements are not treated as revenue expense. For example, replacing a broken window is a repair and is deductible. But adding an extension to increase the value of the property is a capital improvement; it goes through the Capital Allowances system instead.

What About Working from Home as a Director?

This is a common question for micro entity company directors who run their business from home. Your company can pay you a flat rate for using your home as an office. HMRC allows a reasonable charge if there is a genuine business reason and a formal agreement in place between you and your company.

Alternatively, the company can reimburse a proportion of household bills based on the number of rooms used and the time spent on business activities. Keep records to support this.

Can You Claim Travel Expenses?

Yes, business travel is allowable. This includes:

• Train, bus, or flight tickets for business trips
• Hotel accommodation when travelling for work
• Business mileage if you use your own car (HMRC-approved mileage rates apply)
• Parking costs for business trips
• Congestion charges incurred during business travel

Important: commuting from your home to your regular workplace is not allowable. HMRC treats that as a personal expense, not a business one.

If the company owns a vehicle used for business, fuel costs, insurance, and servicing are allowable. But if there is any private use, a Benefit in Kind charge may apply to the director or employee using it.

Are Marketing and Advertising Costs Deductible?

Yes. Promoting your business is a legitimate and fully deductible expense. This covers:

• Website design and hosting
• Online advertising (Google Ads, social media ads)
• Print advertising and leaflets
• Branded merchandise used for promotion
• PR and marketing agency fees
• Sponsorship, where the primary purpose is to advertise the business

Can You Deduct Professional and Legal Fees?

Yes, in most cases. Accountancy fees, bookkeeping costs, and the fee for filing your Corporation Tax return are all allowable. Legal fees for everyday business matters, such as reviewing contracts or chasing unpaid invoices, are deductible too.

However, legal costs relating to a capital transaction (like buying a property or acquiring another company) are capital in nature and handled differently. They are not deductible as a revenue expense.

What Technology and Equipment Costs Can You Claim?

For smaller purchases, such as software subscriptions, stationery, or small tools, these are generally treated as day-to-day running costs and are fully deductible in the year of purchase.

For larger items like computers, machinery, or office furniture, these are treated as capital assets. You do not deduct their full cost in year one as an expense. Instead, you claim relief through the Annual Investment Allowance (AIA), which currently allows you to deduct up to £1 million of qualifying capital expenditure in full in the year of purchase. For most micro entity companies, this covers everything you are likely to buy.

Are Bank Charges and Finance Costs Allowable?

Yes. Bank charges on your business account, loan interest for business borrowing, and finance costs directly related to the business are deductible. Be careful with loans that have a personal element; only the business portion is claimable.

What About Business Insurance?

Premiums for business insurance are allowable expenses. Common types include:

• Professional indemnity insurance
• Public liability insurance
• Employers' liability insurance
• Office or equipment insurance
• Director and officer liability insurance

Can You Claim Subscriptions and Memberships?

Yes, if the subscription is relevant to the business. This includes trade body memberships, professional associations, and industry publications. Personal memberships, like a gym or a social club, are not allowable, even if you occasionally talk about business there.

What Are Allowable and Not Allowable Expenses?

Understanding what you cannot claim is just as important as knowing what you can. Here are the main categories of non-allowable expenses that catch many small business owners off guard.

What Expenses Are Not Deductible for a Micro Entity Company?

1. Client Entertainment This is one of the most common mistakes. Taking a client out for dinner, arranging corporate hospitality, or buying gifts for clients, these are almost never deductible for Corporation Tax purposes. HMRC draws a clear line between staff entertaining (which has some limited relief) and client entertaining (which does not).

2. Personal Expenses Mixed with Business If you buy something that is partly personal and partly for business, and you cannot separate the two, HMRC will typically disallow the whole amount. Where you can clearly identify the business portion, only that part is claimable.

3. Fines and Penalties Any fines, including Companies House late filing penalties, HMRC penalties, or parking fines incurred during business travel, are not allowable. The logic is that a company should not benefit from a tax deduction as a result of breaking the law.

4. Depreciation You cannot deduct depreciation charged in your accounts as a tax expense. This is replaced by the Capital Allowances system, which HMRC operates on its own rules.

5. Dividends Dividends paid to shareholders are not an expense of the business. They are a distribution of profit after tax, so they do not reduce your Corporation Tax liability.

6. Personal Tax Liabilities The company cannot deduct your personal Self Assessment tax bill, your personal student loan repayments, or any other personal liabilities, even if the company pays them on your behalf. These would typically be treated as a benefit or a director's loan.

How to Categorise Expenses for a Small Business?

Getting your expense categories right from the start saves a lot of headache at year-end. Here is a practical approach that works well for micro entity companies.

Should You Keep Business and Personal Finances Separate?

Always, yes. Open a dedicated business bank account for your company if you have not already. This one step alone makes categorising expenses significantly easier and gives you a clear audit trail if HMRC ever asks questions.

What Categories Should You Use for Your Accounts?

Most accounting software, and your accountant, will use standard nominal codes or categories. Common ones for a micro entity company include:

• Cost of Sales: direct costs of delivering your product or service (e.g. materials, subcontractor costs)
• Staff Costs: salaries, NIC, pensions
• Premises Costs: rent, rates, utilities
• Motor and Travel: fuel, mileage, accommodation, public transport
• IT and Communications: phone, broadband, software, hardware
• Marketing and Advertising: ads, website, printed materials
• Professional Fees: accountant, solicitor, bookkeeper
• Insurance: all business insurance policies
• Bank Charges: fees, interest on loans
• Sundry/General Expenses: anything else that is clearly business-related

Keeping your expenses in clear categories not only helps with your Corporation Tax return but also makes your annual accounts much quicker and cheaper for your accountant to prepare.

How Long Should You Keep Your Records?

HMRC requires limited companies to keep financial records for a minimum of 6 years from the end of the accounting period they relate to. This includes receipts, invoices, bank statements, and any contracts or agreements that support an expense claim.

Digital records are perfectly acceptable. Many business owners photograph receipts and store them using accounting software. What matters is that the record is readable and accessible if HMRC requests it.

Are There Any Special Rules for Directors of Micro Entity Companies?

Yes, and this is where it gets a little more nuanced. As a director-shareholder of a micro entity company, you wear two hats: you are an employee of the company, and you are an owner.

What Can the Company Pay for on Your Behalf?

The company can pay for, and deduct, the following on your behalf as a director:

• Your professional subscriptions relevant to your role
• Your work-related training
• Business travel costs
• Appropriate home office costs under a formal agreement
• Any expenses you incur personally for business purposes, provided you have receipts and they meet the "wholly and exclusively" test

What Is a Director's Loan Account and Why Does It Matter?

If the company pays for something personal, or you take money from the company that is not a salary or dividend, it goes through your Director's Loan Account (DLA). If you owe the company money at the year-end (an overdrawn DLA), there can be additional tax charges: a Corporation Tax charge of 33.75% under S455 if the loan is not repaid within 9 months of the year-end. So keeping on top of your DLA is important.

How Do I Claim Allowable Expenses on My Corporation Tax Return?

Your accountant will typically handle this as part of preparing your annual accounts and Corporation Tax return (CT600). The process works like this:

1. Your income and expenses are recorded throughout the year (usually in accounting software)
2. At year-end, your accounts are prepared, showing your profit or loss
3. Adjustments are made for items that are not tax-deductible (like depreciation and client entertainment)
4. Capital allowances are calculated and added as a deduction
5. The resulting taxable profit is used to calculate your Corporation Tax at the current rate (currently 25% for profits over £250,000, or 19% for profits up to £50,000, with marginal relief between the two, although most micro entity companies will fall into the 19% band)

What Records Should You Keep to Prove Your Expenses?

For every expense you claim, you should hold:

• A valid receipt or invoice showing the amount, date, supplier, and what was purchased
• Bank statements confirming the payment was made
• Where relevant, a note of the business purpose (especially for travel or meetings)

HMRC does not require you to submit these with your return, but you must be able to produce them if asked during a compliance check.

Do You Need an Accountant to Handle This?

You are not legally required to use an accountant, but most micro entity company directors find it well worth the cost. A good accountant will:

• Make sure you claim every allowable expense you are entitled to
• Spot expenses you might have missed
• Keep your records compliant with HMRC requirements
• File your Corporation Tax return and Companies House accounts on time
• Advise you on the most tax-efficient way to draw income from your company

For a micro entity company, the accountancy fee itself is an allowable expense, so part of the cost is offset immediately.

Summary: Key Points to Remember

Running a micro entity company means you have access to the same Corporation Tax expense reliefs as larger businesses. The key is knowing what qualifies, keeping clean records, and making sure nothing slips through the net. Here is a quick recap:

• Expenses must be wholly and exclusively for business purposes
• Common allowable costs include staff, premises, travel, marketing, professional fees, and technology
• Client entertainment, personal expenses, fines, dividends, and depreciation are not deductible
• Keep all receipts and records for at least 6 years
• Use a separate business bank account and categorise expenses consistently
• Speak to an accountant if you are unsure; their fee is itself a deductible expense

If you would like help managing your micro entity company's accounts and making sure you are not overpaying on your tax bill, get in touch with our team. We work with small business owners and directors across the UK every day to keep their finances in order and their tax bills as low as legally possible.