Tax deduction
Tax deduction is an amount you can subtract from your taxable income or profit before tax is worked out. In the UK this usually means allowable business expenses and certain forms of tax relief, so you pay tax on a smaller figure. It is not the same as a tax credit, which reduces the tax bill itself.
Simple illustration
If your taxable profit is 50,000 and you claim 5,000 in allowable expenses, your tax is calculated on 45,000. This is only an illustration; no tax rate is assumed.
Don’t confuse a deduction you claim with tax deducted at source (like payroll deductions) — that is money taken off a payment, not a reduction of your taxable income. An allowance sets aside some income that isn’t taxed, while a deduction reduces income before the tax is calculated.
Where UK small businesses most often claim deductions:
- Allowable business expenses: day‑to‑day costs incurred wholly and exclusively for the business.
- Capital allowances: the cost of equipment, machinery or vehicles claimed over time or via available allowances.
- Use of home and business travel: claim the business proportion or use approved simplified methods.
- Pension contributions: relief may apply depending on how contributions are made.
- Charitable donations: gifts under recognised schemes can attract tax relief.
Practical tip
Keep clear records and only claim the business part of mixed‑use costs. Separating personal and business spending makes deductions easier to support.
