Expense claims drive a meaningful chunk of contractor net income. Get them right and you reduce corporation tax, NIC, and PAYE legitimately. Get them wrong and HMRC opens an enquiry with interest and penalties. The rules have not changed dramatically in 2026, but the enforcement focus has.
The wholly and exclusively test
Section 34 ITTOIA 2005 disallows expenses not incurred "wholly and exclusively" for the trade. For a limited company contractor, the equivalent is the corporation tax "wholly and exclusively" test. The test is strict: dual-purpose expenses are usually disallowed unless an identifiable business portion can be separated.
Home office costs
If you work from home as a contractor, you have two routes.
- HMRC's flat rate: GBP 6 per week (GBP 312 per year) for any director or employee working from home. No receipts needed. Suitable for occasional home working.
- Actual costs: a proportion of utilities, council tax, rent or mortgage interest, broadband, based on the area used for business and the time spent. This typically yields GBP 600 to GBP 1,500 per year for a full-time home worker. Maintain a calculation showing rooms, area, and hours.
Capital Gains Tax point: if you claim a room as exclusively used for business, that portion of your principal residence can lose Private Residence Relief on sale. We always advise structuring claims as "predominantly" not "exclusively" to preserve PRR.
Mileage and travel
Approved Mileage Allowance Payments (AMAPs) sit at 45p per mile for the first 10,000 business miles and 25p per mile thereafter. Travel from home to a regular workplace is private and not deductible. Travel to a temporary workplace (under 24 months at the same site) is deductible.
The 24-month rule trips up many contractors. From the moment you expect (or it becomes apparent) that an engagement will exceed 24 months at one location, the workplace becomes permanent and travel is no longer claimable. Contract extensions need careful tracking.
Training and professional development
Training that maintains or updates existing skills is deductible. Training that develops genuinely new skills (a qualification you did not have) is generally treated as capital and disallowed. AWS certification for a cloud architect: usually deductible. A first MBA: usually disallowed. We assess each case in context.
Equipment and technology
Laptops, monitors, phones, and software are capital expenses claimable through the Annual Investment Allowance (AIA), which provides 100% first-year relief up to GBP 1m. For most contractors, AIA covers all equipment purchases. Personal use should be incidental; otherwise apportion.
Mobile phone contracts taken out by the company in the company's name are fully deductible with no benefit-in-kind, even with personal use. A contract in the contractor's personal name is not.
Subsistence and meals
Subsistence is allowable when working away from the normal place of work. For a contractor on a client site that qualifies as a temporary workplace, lunches and reasonable meals on working days are deductible. Alcohol is generally not. Keep receipts. The benchmark scale rates (GBP 5 for breakfast, GBP 10 for two-meal day, GBP 25 for late evening) can simplify record-keeping.
Pension contributions
Employer pension contributions from the company are deductible against corporation tax. There is no NIC. The annual allowance is GBP 60,000 (tapered for high earners), and unused allowance from the previous three tax years can be carried forward. This is the single largest legitimate tax shield for outside-IR35 contractors.
What HMRC challenges most
- Spouse salaries without evidence of work performed.
- Entertainment as "client meetings" without business purpose documentation.
- Clothing expenses (only protective or branded uniforms are allowable).
- Home office at 100% of utilities.
- "Client gifts" exceeding the GBP 50 small gift threshold.
How we keep contractors clean
Our contractor service includes monthly bookkeeping with expense categorisation, end-of-year directors' loan reconciliation, and a pre-filing review of any expense category triggering HMRC's risk profile. Bookkeeping done right means quarterly tax forecasts that are not nasty surprises. Reach out or browse our contractor and freelancer sector page.