What Are Allowable Expenses and Flat Rate Expenses?

Mixing up allowable and flat rate expenses is a common and much costly error. Basetax.ai automates the entire process with AI, ensuring accurate categorisation and HMRC-compliant filing to prevent penalties and secure your full refund.

Running a business in the UK can be expensive. For example, there were about 5.5 million small and medium‑sized enterprises (SMEs) in the UK in 2024, making up over 99% of all businesses. 

Among the costs these businesses face, one major area is payroll and tax: employer National Insurance contributions alone are expected to raise just under £170 billion in 2024‑25, around one‑sixth of all tax revenue. With numbers like these, it’s easy to see why business owners seek legal ways to reduce costs.

Two key tools that can help businesses save money are allowable expenses and flat rate expenses. These two approaches help relieve financial pressure on businesses and staff alike, yet they often cause confusion.

What are allowable expenses?

Allowable expenses are business-related costs that can be subtracted from a company’s profits before it calculates how much tax it needs to pay. In simple terms, they are expenses your business has that can lower its tax bill.

Allowable expenses include:

• Office supplies and equipment: Items like computers, stationery, and printers that are needed for the business to operate.
• Salaries and wages: The cost of paying employees and providing any benefits.
• Rent and utilities: Costs for renting office space and paying for services like electricity, gas, and water.
• Travel expenses: Costs for business trips, such as train tickets, flights, or fuel for company vehicles.
• Insurance: Business-related insurance, such as public liability or professional indemnity.
• Marketing and advertising: Costs for promoting the business, such as digital ads and marketing materials.

What are flat rate expenses?

Flat rate expenses are a simpler way of claiming certain work-related costs. Instead of keeping detailed receipts for every small cost, employees in specific industries can claim a fixed amount set by HMRC based on their job role. This method makes the process easier and quicker for both employees and employers.

For example, a mechanic may claim a flat rate for the cost of tools, and a nurse can claim a flat rate for cleaning their uniform. These flat rates are established by HMRC to cover common work-related expenses in certain professions.

Why use flat rate expenses?

The advantage of flat rate expenses is that they simplify the process. Employees don’t need to track every individual cost, as they can simply claim the fixed amount that HMRC has set for their industry. This helps save time and reduces the amount of paperwork needed.

Key differences between allowable expenses and flat rate expenses

While both allowable and flat rate expenses help businesses reduce their tax burden, they work in slightly different ways:

1. Claiming process: Allowable expenses require businesses or employees to keep receipts or other proof of actual costs. Flat rate expenses don’t require receipts because they are based on a fixed amount that HMRC has set for the industry.
2. Scope: Allowable expenses cover a wide range of business costs, from office supplies to employee salaries. Flat rate expenses, however, are specific to certain jobs and industries.
3. Flexibility: With allowable expenses, businesses can claim back the exact amount they spent. Flat rate expenses are fixed, so the claim amount is the same for everyone in that particular industry, regardless of the actual cost.
4. Record keeping: Allowable expenses require detailed records of each transaction, while flat rate expenses require much less paperwork. Employees simply need to track the flat rate claim, not the individual costs.

How can technology help?

Managing allowable and flat rate expenses can be tricky, but technology can make it much easier. Basetax.ai is an AI-powered accounting and tax platform that helps businesses handle expenses efficiently. Here’s how Basetax.ai can make the process easier:

• Automated bookkeeping: Basetax.ai automatically tracks and categorises expenses in real time, helping businesses separate allowable and flat rate expenses and reducing errors.
• Tax filing: The platform ensures businesses stay compliant with HMRC’s rules for Self-Assessment filing and Making Tax Digital (MTD), automatically generating the necessary reports.
• Expense categorisation: Basetax.ai helps businesses manage both allowable and flat rate expenses, ensuring they follow HMRC guidelines.

How to stay compliant with HMRC

To avoid issues with HMRC, businesses need to understand the rules about allowable and flat rate expenses. Here are a few tips to make sure your business stays compliant:

1. Keep detailed records: For allowable expenses, ensure you have receipts, invoices, and other proof of business-related costs. This is crucial if HMRC asks for evidence.
2. Understand what’s claimable: Learn which expenses are allowable and which are flat rate. Don’t try to claim personal expenses, as this could result in penalties.
3. Set clear policies for employees: If your business reimburses expenses, make sure employees understand which costs they can claim and what documentation they need.
4. Use accounting software: Digital platforms like Basetax.ai can help keep records organised, track expenses, and ensure compliance with HMRC’s rules.
5. Review HMRC guidelines: Tax rules change from time to time, so it’s important to stay updated on any changes to allowable expenses and flat rate expense schemes.

Final thoughts

Allowable expenses and flat rate expenses are two useful ways businesses can reduce their tax burden, but they work in different ways. Allowable expenses are business-related costs that can be deducted from a company’s profits, while flat rate expenses are fixed amounts that employees in certain industries can claim for specific work-related costs.

The key to success is understanding these differences and making sure claims are processed correctly. Technology, such as Basetax.ai, can simplify the process, making it easier for businesses to manage their expenses, automate bookkeeping, and stay compliant with HMRC rules. By using technology, businesses can save time, reduce errors, and focus on growing their operations without worrying about tax-related issues.