EVERYTHING YOU NEED TO KNOW...
Navigating tax deductions can feel overwhelming, but understanding the basics can help you save money and make smarter financial decisions. This article will guide you through the essentials of tax deductions, helping you maximise your savings with ease.
Lets get going!
What Are Tax Deductions and Why Should You Care?
Tax deductions are like little helpers that can shrink your tax bill. They’re completely legal ways to pay less tax, approved by HMRC.
When used correctly, tax deductions could save you hundreds or even thousands of pounds each year. Yet many people miss out simply because they don’t know what they can claim.
Understanding which deductions apply to your situation isn’t just smart, it’s money in your pocket that would otherwise go to the taxman. Claiming tax deductions effectively requires knowing the rules and maintaining accurate records.
How Do Tax Deductions Actually Work for Taxable Income?
A tax deduction reduces the amount of income that gets taxed. The deduction comes off your income before the tax is calculated, unlike tax credits which reduce the actual tax you owe afterwards.
Think of it this way: if you earned £50,000 and have £5,000 in deductions, you’ll only be taxed on £45,000. This simple mechanism can significantly reduce your tax burden.
The higher your tax rate, the more valuable deductions become. A £1,000 deduction saves a basic-rate taxpayer £200, but a higher-rate taxpayer would save £400 on the same deduction. Tax deductions can also reduce your income tax liability by lowering the amount of income subject to tax.
What Business Expenses Can You Actually Deduct?
For business owners and self-employed folks, you can deduct costs that are “wholly and exclusively” for business. This includes things like office supplies, business travel, marketing expenses, professional insurance, and allowable expenses that are incurred 'wholly, exclusively and necessarily' in performing job duties.
For everyone, you might be able to deduct pension contributions, charitable donations through Gift Aid, and professional memberships related to your job. Additionally, some home working costs can be claimed by most taxpayers. Tax deductible expenses also include employment-related costs that are not reimbursed by employers, such as uniforms and travel.
Software subscriptions and equipment purchases can also be deductible when they’re necessary for your work or business operations.
How Do Self-Employed People Claim Tax Deductions on a Self Assessment Tax Return?
If you're self-employed, you'll claim deductions on your Self Assessment tax return. You can deduct a portion of your home bills if you work from home regularly, including heating, electricity, and internet.
Vehicle costs can be claimed using actual expenses or the simpler mileage rate (45p per mile for the first 10,000 miles, then 25p). Phone bills can be partially claimed, based on what percentage is for business use.
Keep receipts for everything! HMRC might ask to see them up to 6 years later, and proper documentation is your best defence in case of an enquiry.
What About Employees? Can They Claim Too?
Yes! Employees can claim tax relief on professional subscriptions needed for their job and working from home costs (£6 per week without needing receipts). Uniform cleaning, using your own car for work duties, and some job-related training are also claimable.
Most employee claims are made through a P87 form or your Self Assessment if you do one. The process is straightforward once you know what you’re entitled to claim. Claiming these deductions can impact an individual's tax code, resulting in automatic adjustments in their pay packets.
I once helped a colleague claim five years’ worth of professional membership fees, resulting in a tax refund of over £600. She hadn’t realised these were tax-deductible until we discussed it over lunch!
Which Tax Deductions Are People Most Likely to Miss?
The Marriage Allowance lets a lower-earning spouse transfer £1,260 of their Personal Allowance to their partner, saving up to £252 a year. Working from home tax relief is often overlooked, even by people who qualify.
Landlords frequently miss deductions for mortgage interest, property repairs, and insurance. Mileage for business journeys adds up quickly but is commonly forgotten about. Home working arrangements can also affect eligibility for private residence relief and capital gains tax, especially when a room is used for both business and personal purposes.
Many self-employed people don’t realise they can claim for things like professional development courses and relevant publications. These smaller items can add up to significant savings over a tax year.
How Do You Keep Records for Tax Deductions?
Use a separate bank account for business transactions to make tracking easier. Take photos of receipts right away, as they often fade over time, making them invalid as evidence. Maintaining accurate records is crucial for tax purposes to ensure all deductions meet the necessary criteria.
Set aside 15 minutes each week to log expenses while they’re fresh in your mind. Keep a simple spreadsheet or use an app to track everything systematically.
For business mileage, note the date, destination, reason for travel, and distance for each trip. This level of detail will satisfy HMRC requirements and make completing your tax return much simpler.
Are There Any Special Deductions for Different Industries?
Tradespeople can deduct tool purchases and replacement costs. The tax treatment of these expenses allows tradespeople to claim deductions for the cost of tools and their replacements, reducing their taxable income. Creative professionals can often deduct tickets to performances or exhibitions as research for their work.
Healthcare workers may claim professional indemnity insurance and some training costs. Landlords can deduct property management fees, insurance, and various maintenance expenses.
IT professionals can usually deduct software subscriptions and technical equipment. Each industry has specific deductions that reflect the unique costs associated with that profession.
What's the Smartest Way to Handle Tax Deductions?
Don’t wait until January to think about tax deductions. Keep track all year round and review your potential deductions quarterly so nothing gets forgotten.
If your tax situation is complicated, getting advice from a tax professional usually pays for itself. Remember, it’s not about bending rules, it’s about claiming what you’re entitled to under the law. Beneficiaries of pension funds should also be aware of the tax liabilities they may face, including how they can pay tax on pension withdrawals at their marginal income tax rate.
Consider using a dedicated tax app to make the whole process easier. Technology can significantly reduce the administrative burden of tracking and claiming deductions.
Conclusion
Break the task into smaller chunks throughout the year instead of facing it all at tax time. Set up a simple system from day one, even a shoebox for receipts is better than nothing.
Take advantage of technology to make things easier. Many apps now allow you to photograph receipts and automatically categorise them, saving hours of manual work.
Remember that properly claiming deductions isn’t just saving money, it’s following tax law correctly. You’re entitled to these deductions, so claiming them is simply good financial management. For tax purposes, it is crucial to ensure that all deductions meet the specific criteria set by tax regulations.
Pie is the UK’s first personal tax app created specifically for working individuals struggling with tax burdens. It’s the only self assessment solution offering built-in bookkeeping, real-time tax figures, simplified returns, and expert advice when you need it.
Why not make tax deductions work for you this year? You’ve earned your money, don’t give away more of it than you need to!
