What does ‘tax deductible’ mean?

It’s one of those questions that people are almost too embarrassed to ask.

But, don’t worry. We get asked it all the time.

Th confusion is that when something is described as ‘tax deductible’ it sounds like you can deduct what you’ve just spent from your tax bill.

You can’t.

What you can do is deduct the expense from your profit before you calculate how much you owe.

For example, if you have a profit of £20,000 and you spend £2,000 on something tax deductible your profit is now £18,000. Your tax bill will come down by 20% of £2,000 ie £400. In effect, the thing you’ve bought only really cost £1,600.

So, spending £2,000 saved £400 in tax. For a higher rate tax payer this would be £800. (I’ve ignored national insurance here which does make the savings a bit more).

If something is described as not tax deductible – like entertaining or personal expenses – then you wouldn’t be able to deduct them from your profit.

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