What Is the Difference Between Allowable and Disallowable Expenses

What Are Allowable Expenses

Allowable expenses are costs that are wholly and exclusively for business purposes. In simple terms, they are the legitimate running costs of your business that can be deducted from your income when calculating taxable profit.

By claiming allowable expenses, you reduce your tax bill because they lower the amount of profit HMRC taxes. These expenses vary depending on the nature of your business but typically include things like office supplies, travel for business purposes, or professional fees.

Example of allowable expenses:
A self employed designer buys a laptop solely for client work. The cost of the laptop is an allowable business expense because it is used entirely for business.

What Are Disallowable Expenses

Disallowable expenses are costs that are not related to business activities or that have a personal element. These cannot be deducted from your income when calculating taxable profit.

Disallowable expenses might still be genuine costs you pay, but HMRC does not allow them to reduce your tax liability because they are either personal, capital in nature, or unrelated to earning income.

Example of disallowable expenses:
If that same designer buys clothes to wear to client meetings, the cost is disallowable because clothing has a personal benefit and is not exclusively a business cost.

Key Differences Between Allowable and Disallowable Expenses

The main distinction is based on purpose and use.

Criteria Allowable Expenses Disallowable Expenses

Purpose Wholly and exclusively for business use Personal or partly personal use

Impact on tax Deducted from profits before tax Cannot be deducted from profits

Examples Stationery, travel to clients, business insurance Personal travel, clothing, fines

HMRC treatment Reduces taxable profit No tax benefit

The clearer the business link, the more likely an expense will qualify as allowable.

Common Allowable Expenses

The types of allowable expenses depend on whether you are self employed, a partnership, or a limited company. However, some are common to most businesses:

• Office supplies such as stationery, computers, and software.

• Business premises rent, heating, and electricity.

• Travel for business purposes, including mileage and accommodation.

• Advertising and marketing costs.

• Professional fees such as accountants or solicitors.

• Insurance related to the business.

• Staff wages, pensions, and employer National Insurance contributions.

• Subscriptions to professional bodies.

These expenses must be used exclusively for business and supported by receipts or invoices.

Common Disallowable Expenses

Disallowable expenses often include items that have a personal benefit or are not directly related to earning business income. Examples include:

• Personal living expenses such as rent, food, or clothes.

• Fines and penalties, including parking tickets.

• Client entertainment or hospitality.

• Charitable donations not made through a company scheme.

• Drawings or money taken out of the business by the owner.

• Depreciation or loss on sale of fixed assets (these are treated differently under capital allowances).

For limited companies, disallowable expenses can also include personal items paid through the business that are not related to company activity.

Mixed-Use Expenses

Some expenses serve both personal and business purposes. In these cases, you can only claim the business portion as allowable.

Example:
If you use your home broadband for both personal and work purposes, you can apportion the cost. For instance, if 60 percent of the use is business related, you can claim 60 percent as an allowable expense.

The same principle applies to phone bills, vehicle costs, and utilities. Keeping detailed records helps you justify your claim if HMRC asks for evidence.

Capital vs Revenue Expenses

Another key distinction is between capital and revenue expenses.

• Revenue expenses are day-to-day costs needed to run your business, such as rent, salaries, or office supplies. These are usually allowable.

• Capital expenses involve buying or improving long-term assets, such as property, machinery, or vehicles. These are not allowable in the usual sense but may qualify for capital allowances, which let you deduct part of the asset’s cost each year.

Understanding this difference ensures you treat each cost correctly on your tax return.

HMRC’s “Wholly and Exclusively” Rule

HMRC applies the “wholly and exclusively” test to decide if an expense is allowable. This means the cost must be incurred entirely for business reasons. If there is a personal element, you must separate or exclude it.

Example:
If you travel to visit a client but extend the trip for a personal holiday, you can only claim the travel costs directly related to the client meeting, not the leisure portion.

Failing to apply this rule can result in disallowed claims and potential penalties if HMRC reviews your accounts.

Keeping Records of Expenses

To claim expenses, you must keep clear and accurate records. This includes:

• Receipts, invoices, and bank statements.

• Digital copies or scans of documents.

• Detailed notes explaining any apportionment between business and personal use.

HMRC requires records to be kept for at least five years after the tax return deadline for the relevant year. Using accounting software such as QuickBooks, Xero, or FreeAgent helps automate expense tracking and ensure compliance with Making Tax Digital.

Why It Matters to Get It Right

Incorrectly claiming disallowable expenses can lead to HMRC penalties, backdated tax bills, or even investigations. On the other hand, failing to claim legitimate allowable expenses means paying more tax than necessary.

Understanding the difference ensures that your tax return is both accurate and efficient. An accountant can review your expenses to make sure they are correctly categorised and that you are claiming everything you are entitled to.

How an Accountant Can Help

An accountant can make expense management simple and accurate by:

• Identifying allowable expenses specific to your business.

• Advising on apportioning mixed-use costs fairly.

• Helping you track and record expenses using digital tools.

• Ensuring you claim all available reliefs, including capital allowances.

• Reviewing your accounts to ensure compliance with HMRC’s rules.

They can also prepare your Self Assessment or company tax return and communicate with HMRC if any questions arise about your claims.

Summary

The difference between allowable and disallowable expenses comes down to purpose. Allowable expenses are wholly and exclusively for business use, reducing your taxable profit, while disallowable expenses are personal or unrelated to business activities and cannot be claimed.

By keeping detailed records, separating personal costs, and seeking advice when unsure, you can stay compliant with HMRC and ensure you pay only the tax you owe. A specialist accountant can help you manage this process effectively, saving both time and money.