Business Expenses Guide for Sole Traders and Limited Company Directors in 2026 (Part 1)

For many business owners, the difference between paying too much tax and paying the right amount often comes down to understanding business expenses.

I was reminded of this during a meeting with a new client in Tunbridge Wells earlier this year. He ran a successful IT consultancy and assumed he could claim only obvious costs such as software subscriptions and travel. After reviewing his records, we identified several legitimate expenses he had been paying personally for years — including part of his home office costs, broadband, and business use of his mobile phone. The result? A tax saving of just over £3,000 for the year.

That is not unusual.

At Peter Hodgson & Co, we regularly speak to sole traders, contractors, and limited company directors who are either missing valid claims or claiming expenses incorrectly, which can create problems if HMRC ever asks questions.

This guide explains the rules in plain English. No jargon. No complicated tax manuals. Just practical advice you can use in 2026 to keep accurate records, claim what you are entitled to, and avoid common mistakes.

What expenses can a limited company claim?

The starting point is surprisingly simple.

HMRC allows a limited company to claim expenses that are “wholly and exclusively” for the purposes of the business. In other words, the expense must exist because of the business, not because of your personal life.

What counts as an allowable business expense?

Typical allowable expenses include:

• Accountancy fees
• Bookkeeping software
• Business insurance
• Office rent
• Telephone and internet costs
• Salaries and employer’s National Insurance
• Pension contributions
• Professional subscriptions
• Business travel
• Marketing and advertising
• Training courses related to your business

A useful test is this: If you stopped trading tomorrow, would you still need to pay for it?

For example, if you subscribe to accounting software solely to manage your company accounts, that is clearly a business expense. If you pay for a streaming service that you also use with your family, it is not.

The difference between allowable and disallowable expenses

Some expenses catch directors out because they feel “business-related” but are not fully allowable.

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I often explain this to clients using a simple example. A builder can usually claim steel-toe boots and high-visibility clothing because they are protective equipment. A consultant buying a £700 suit for client meetings generally cannot, even if the suit is worn only for work.

Common business expenses directors can claim

In practice, these are the areas where we see the most missed claims:

• Frequently overlooked
• Business use of home
• Broadband and mobile phone costs
• Computer equipment and monitors
• Professional indemnity insurance
• Bank charges on a business account
• Business mileage using a personal car
• Subscriptions to trade publications or software

One contractor we worked with had purchased two monitors, a docking station, and a webcam during a home-working upgrade. He had paid for them personally and never reimbursed himself from the company. Once we documented the purchases properly, the company was able to claim the cost and reimburse him tax-free.

Small details matter.

How HMRC decides whether an expense is allowable

HMRC will look at evidence and commercial logic.

Keep:

• Receipts or invoices
• Bank or card statements
• Mileage logs
• Notes explaining the business purpose
• Copies of contracts or booking confirmations

A £15 parking receipt is unlikely to attract much attention on its own. A pattern of large payments with no supporting evidence is much more likely to raise questions.

I always tell clients: write a short note at the time you incur the expense. For example, “Train to London for client meeting with ABC Ltd.” That five-second habit can save hours of work later if you ever need to justify the claim.

Keeping records for business expenses

HMRC requires companies to keep records for at least six years.

Cloud accounting software such as QuickBooks or Xero makes this much easier. You can photograph receipts on your phone, attach them to transactions, and keep everything in one place.

A simple monthly routine works well:

• Download bank statements
• Upload receipts
• Review any personal items paid from the company account
• Reimburse yourself for business expenses paid personally
• Ask your accountant about anything unusual before the year end

The business owners who stay on top of this usually spend less time on bookkeeping and pay lower accountancy fees because the records are cleaner.

Can I claim my mobile phone through my company?

This is one of the questions we hear most often, especially from contractors and consultants.

The short answer is yes — in many cases, a company can provide a mobile phone to a director or employee without creating a taxable benefit.

Company mobile phone vs personal mobile phone

The easiest option is for the company to take out the contract in its own name.

If the contract is between the company and the provider, and the phone is provided to you as a director or employee, HMRC generally treats it as tax-free, even if there is some personal use.

That surprises many people!

I remember a client saying, “Surely I need to calculate the percentage of personal calls?” In most cases, you do not. HMRC accepts that incidental personal use is allowed where the company owns the contract.

How many phones can a director claim?

HMRC allows one mobile phone per employee or director under this exemption.

If your company provides a second phone to the same person, the exemption may not apply, and the additional phone could become a taxable benefit.

For a husband-and-wife company, however, the company can usually provide one phone to each director, provided both are genuinely working in the business.

Can my company pay my personal mobile phone bill?

This is where things become more complicated.

If you personally own the contract and the company simply pays the bill, HMRC may treat the payment as:

• additional salary, or
• a director’s loan benefit.

A better approach is usually to:

• transfer the contract to the company, or
• have the company reimburse only the business proportion of the bill.

For example, if you estimate that 70% of your usage is business-related, the company could reimburse 70% of the monthly cost, provided you keep evidence of how you reached that estimate.

What happens if I use the phone personally?

If the company owns the contract, incidental personal use is normally not a problem.

That means checking personal emails, calling family members occasionally, or using personal apps does not usually create a tax charge.

However, if the company is paying for significant personal costs — such as international holiday roaming charges that are clearly unrelated to the business — HMRC could argue that part of the expense is not allowable.

Use common sense. If a charge would look obviously personal to an outsider, keep it separate.

HMRC rules on mobile phone expenses

To keep the claim safe:

• Best practice checklist
• Put the contract in the company’s name
• Pay the bill from the company bank account
• Provide only one phone per director or employee
• Keep copies of the contracts and invoices
• Avoid putting obviously personal purchases through the company account

For most directors, this is a straightforward and valuable claim. A £60 monthly contract costs £720 per year, and paying that through the company is usually far more tax-efficient than paying it personally from taxed income.

Can I claim broadband as a business expense?

Broadband is another area where the answer depends on who owns the contract and how the connection is used.

With so many businesses now operating partly from home, this has become increasingly important.

Can my company pay for home broadband?

If your company installs a new broadband line specifically for business use, the company can usually claim the full cost.

For example, a design agency operating from a garden office with a dedicated business broadband connection would normally be able to claim:

• installation charges,
• monthly line rental,
• broadband packages, and
• business-related add-ons.

That is the cleanest scenario.

Existing broadband contract vs new business contract

Most directors already have broadband at home before they start using it for work.

In that case, HMRC’s view is stricter. Because the connection would exist anyway for personal use, the company cannot usually claim the entire bill unless there is a clear additional cost caused by the business.

For instance, upgrading from a standard package to a faster package specifically to support video editing or large client data transfers may justify claiming the extra cost of the upgrade.

I had a conversation with a freelance architect who assumed his company could pay his full £45 monthly broadband bill. In reality, only the additional £12 upgrade cost was clearly linked to the business. Taking the more conservative approach reduced the risk of HMRC challenging the claim later.

How to calculate business use of broadband

If you are a sole trader, you can usually claim the business proportion of your broadband costs.

A reasonable method might be based on:

• time spent working from home,
• the number of people using the connection, and
• the extent of business activities.

Example:

• Monthly broadband bill: £40
• Estimated business use: 50%
• Allowable claim: £20 per month
• Annual claim: £240

The key word is reasonable. HMRC does not expect scientific precision, but they do expect a sensible calculation.

Broadband expenses for home-based businesses

If your home is your main place of business, you may also be able to claim:

• business calls,
• cloud storage subscriptions,
• video conferencing services,
• cybersecurity software, and
• other internet-based business tools.

These are often easier to justify than the broadband line itself because they exist purely for business purposes.

HMRC guidance on internet costs

For limited companies, our usual recommendation is:

Low-risk approach

• Claim the full cost only where there is a dedicated business connection.
• Claim only the additional business-related cost where the home contract already existed.
• Keep invoices and a note explaining why the upgrade or additional package was required for the business.

This is one of those areas where being slightly cautious is often the best long-term strategy.

A quick recap

In this first part of the guide, we have covered the foundations of business expenses:

• Limited companies can claim expenses incurred wholly and exclusively for the business.
• Mobile phones are often tax-free when the contract is in the company’s name.
• Broadband can be claimed, but the treatment depends on whether it is a dedicated business connection or an existing home contract.
• Good record keeping is essential.

These may seem like relatively small expenses, but together they can add up to thousands of pounds each year.

In Part 2, we will look at laptops and computer equipment, company cars, and mileage claims — including the 2026 mileage rates and the tax advantages of electric vehicles.

If you are unsure whether you are claiming expenses correctly, Peter Hodgson & Co can review your current setup and identify opportunities to improve tax efficiency while keeping you fully compliant with HMRC.

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Disclaimer:

The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.