February 2nd, 2016

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.

Keep up to date - Sign up here

  • Just fill in the details below.

Share this post

Filed under

Freelancers Limited Companies


John manages a wide portfolio of owner managed businesses and oversees the smooth operation of the firm’s payroll department.

After obtaining his degree in mathematics from the University of Liverpool, John joined Jonathan Ford & Co in 2004 and qualified as a chartered accountant four years later. John likes to keep abreast of developments in tax and accounting and is responsible for the mentoring of junior staff.

Outside of work, John enjoys keeping fit and is a Liverpool FC season ticket holder.

Give a Goat

Give us a referral and we will donate a goat to a family in Africa

Find out more

Our Newsletter

Enter your email address to subscribe to our mailing list.

  • This field is for validation purposes and should be left unchanged.