Tax deductions

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.

How do tax deductions work?

Tax deductions can be applied to your expenses in two different ways:

1. When you’ve already paid for the expense yourself and you haven’t been reimbursed
2. Your employer has reimbursed you for the expense, but you were taxed on it

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 to claim for tax relief

How you claim for tax relief depends on your employment status. There are two ways to claim back business expenses.

Claim through PAYE

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:

• Pay tax through PAYE
• Have not filled out a Self Assessment form
• Be owed less than £2,500

You can apply online or by filling out a P87 form.

Claim through Self Assessment

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.