Tax deductions are a method of claiming tax relief for certain business expenses. You can claim for tax relief as long as you can prove to HMRC that the item/service you paid for is ‘wholly and exclusively’ in relation to your job. As long as you can prove that it’s a business expense, you can pretty much deduct anything.
Tax deductions can be applied to your expenses in two different ways:
Tax deductions don’t mean that you’ll get an item or service for free. This type of tax relief just means that the VAT tax you’d usually be charged is removed and/or reimbursed. The current rate for VAT is 20%.
For example, a self-employed musician who buys a new guitar for £60 can claim back £12 in tax relief. This is because £12 is 20% of the total amount paid.
It’s important to keep records of what you’ve spent, such as receipts, and claim for tax relief within four years of the end of the tax year that you spent the money.
How you claim for tax relief depends on your employment status. There are two ways to claim back business expenses.
You can claim for business expenses through PAYE (Pay As You Earn). HMRC will adjust your tax code to allow you to take home a bigger proportion of your salary. You’ll get your expenses paid back to you in small increments. To qualify for PAYE tax relief you must:
If you’re self-employed you can claim for tax relief on business expenses through your Self Assessment tax return. You also must use this if you’re PAYE and claiming for tax relief over £2,500.
In the UK, you must keep all of your Tax Records (including expense receipts) for a minimum of 6 years. We recommend storing these digitally where possible to prevent them being lost! Even a scanned copy of a receipt can be a great way to keep things in order.
This all depends on your business and your own needs and preferences. We have experts in Sage, Xero, QuickBooks, Free Agent and more. Speak to our accountants today to discuss your options and we can find the best solutions for you!