Why a £1,000 expense never really costs £1,000
When you run a limited company outside IR35, every pound of genuine business cost is a pound your company doesn't pay corporation tax on — and a pound you don't have to extract as a dividend and pay dividend tax on. Both savings stack. So a £1,000 accountancy bill doesn't reduce your personal take-home by £1,000; it reduces it by the after-tax amount, while you still receive the full £1,000 of service. The calculator above runs the verified outside-IR35 engine twice — once with the spend, once without — and reads the difference. That difference is your effective cost; the rest is tax relief.
The relief rate isn't fixed. It depends on the marginal tax band your company's profit sits in, which is why the day-rate and days-worked inputs matter even though they're not expenses themselves. A contractor billing £550/day across 220 days is extracting profit into the higher-rate dividend band, so each pound of expense saves more tax than it would for someone billing far less. Change the rate and watch the relief percentage move.
The one rule that decides everything: wholly and exclusively
An expense is only allowable if it is incurred wholly and exclusively for the purposes of the trade. That phrase comes straight from HMRC's Business Income Manual (BIM37000), and it is stricter than it sounds. If a cost has a meaningful personal benefit — an everyday coat, your commute to a regular workplace, a phone you also use to call family — it generally fails the test, or it must be apportioned so that only the genuine business share is claimed. The calculator assumes the figures you enter already pass this test; it can't police it for you. Keep receipts, and when a cost is mixed, claim only the business proportion.
The categories that matter — and their traps
Business travel and subsistence is the area HMRC scrutinises most. You can claim travel to a temporary workplace, but the 24-month rule turns a site into a permanent workplace once you expect to be there — or have been there — for more than two years, and at that point travel stops being claimable. Ordinary commuting to a single client site never qualifies. Get this wrong and a routine claim becomes a disallowed one.
Home office and utilities can be claimed as a proportionate share of running costs, or via HMRC's flat rate, when you genuinely work from home. Equipment and software bought for the business — a laptop, a monitor, professional licences — are allowable, though capital items may be relieved through capital allowances rather than as a simple expense. Professional insurance (professional indemnity, public liability) and accountancy fees are clean, everyday allowable costs that almost every contractor carries.
Pension contributions are the biggest lever you control. An employer pension contribution from your company leaves before corporation tax and before any dividend extraction, so it's one of the most efficient ways to move money out of the business — at the cost of locking it away until pension age. It behaves differently from day-to-day running costs, which is why it sits as its own line. Training and subscriptions are allowable where they maintain or update skills you already use in the business; training to acquire an entirely new skill is more likely to be disallowed.
The asymmetry that makes this worth modelling
Here is the part that changes the maths entirely: on an umbrella or inside-IR35 engagement, you generally get none of this relief. Umbrella workers are employees and can only claim a very narrow set of employment expenses; the 5% allowance that once covered running costs was abolished for engagements where the client determines your IR35 status. So the same accountancy bill, the same laptop, the same insurance comes out of already-taxed income with no relief at all. If your legitimate business costs are substantial, that asymmetry meaningfully widens the gap between working outside IR35 and working through an umbrella — which is exactly why it's worth quantifying before you choose a structure. To see that gap on your full take-home, use the contractor take-home pay calculator, which compares umbrella, inside-IR35 and outside-IR35 side by side.
Expenses are not a loophole and they aren't free money — every pound still leaves your bank account. What they do is lower the after-tax cost of running your business properly, and only when you're genuinely in business on your own account. Spend on what the business actually needs, keep the records to prove it, and let the relief follow.