Tax deductions for small businesses: what items are tax deductible?

From advertising your products and fulfilling orders to staying on top of your accounts, there’s a lot to take care of when you’re running your own business. And one thing you can’t avoid is paying tax on your profits.

Handing over money to HMRC is part of the deal when you’re a business owner, but fortunately there are several ways to reduce your bill through tax deductions.

Put simply, tax deductions are expenses you can subtract from your total income or profits to reduce the amount of tax you pay. Taking full advantage of tax deductible expenses for small business can be a game-changer, boosting your bottom line and providing the funds needed to implement your business growth strategies.

That’s what this guide is all about. We’ll walk you through the basics of tax deductibles, including a list of tax deductions for small businesses, how to deduct expenses from your profits, and tips to help you manage tax deductions better.

Common tax deductions for small businesses

There are plenty of tax-deductible expenses out there, but the main thing to remember is that if you need it to run your enterprise, you can probably deduct it. You can claim costs as business expenses if you’re a sole trader or partnership or deduct them from your profits as business costs if you’re a limited company.

For a full list of allowable expenses, you can check the HMRC website. To give you an idea, here are some of the prime examples of tax deductible expenses for small businesses (and large ones).

Startup costs

When you’re figuring out how to start a business, you’ll quickly realise there are quite a few startup expenses involved. These cover everything you need to get your venture off the ground, from the cost of initial materials to paying a designer to come up with a logo for your fledgling brand.

If it took you some time to bring your small business ideas to life, you’re in luck – you can go back as far as seven years when claiming pre-trading expenses. This means you can still deduct costs you racked up before officially starting your business, giving you a better financial start.

Office or shop space and utilities

If you rent a physical space for your business – be it a stall at a weekend market for one of your side hustle ideas or a brick-and-mortar office for your consulting firm – you can deduct the rent, along with any utility bills, from your business profits.

And if you’re a director of a limited company working from home, there’s a perk for you too. You can claim £6 tax relief per week without needing receipts, which counts as an allowable tax deduction for your business. Depending on your setup, other schemes might help you save even more cash – so be sure to consider your options.

Materials and stock

Whether you’re a keen cook looking into things to make and sell at food and drink markets and festivals, or filling the racks of a high-end clothes boutique, the cost of raw materials and inventory is something you can deduct from your taxable profits.

This means that all the supplies and products essential to keeping your business running smoothly can actually help lower your tax bill.

Equipment

Investing in essential equipment for your business can help reduce your tax bill. Long-term assets like printers, card machines, and tools necessary for your operations are deductible as capital allowances.

So, if like many business owners you’re asking, “Is a computer tax deductible for small businesses?”, the answer is yes – no matter your business structure, you can deduct the cost of computers and other essential equipment like self-service kiosks or card readers.

It’s worth noting that capital allowances are capped, which is something to keep in mind should you be considering how to scale a business, with the associated equipment costs that can come with expansion.

Advertising and marketing

Whether you’re launching a social media campaign or distributing unique flyers, money spent on advertising your business is tax deductible, making this a financially smart way to boost customer acquisition.

For example, if you run a café and decide to host a special event to attract more diners, the costs of promoting this event can be deducted. This allows you to experiment with your marketing strategy for small business while benefiting from tax savings – it’s a win-win.

Insurance, software, and professional services

You can deduct costs for essential professional services like accountancy and solicitor fees, along with liability insurance policies you take out as part of your small business risk management strategies. Expenses for software and professional memberships are also deductible.

These deductions not only lower your tax bill but also ensure you have access to expert advice, protection, and the necessary tools to run your business effectively.

Travel for work

Costs associated with business travel, such as transport, accommodation, and meals, are deductible. This is useful if you attend events outside your local area. For example, if you travel from Liverpool to London for a small business cyber security conference, you can deduct your train fare, hotel costs, and even food and drink during your trip.

These deductions apply to various business travel scenarios, whether it’s for small business networking events, trade fairs, or industry conferences. Keeping track of these expenses ensures that you can take full advantage of the tax benefits, making it more affordable to gain valuable insights and connections for your business.

Interest payments or finance costs

If you finance new business assets, you can deduct the interest payments or finance costs from your profits. For instance, say you own a gardening business and decide to buy a high-end lawn mower on credit. While the cost of the equipment itself falls under capital allowances, the interest on the loan used to purchase it is also deductible.

This not only makes significant investments more affordable but also provides a valuable tax benefit.

Bad debt

Dealing with unpaid invoices can be frustrating, but there’s a silver lining. If you have invoices that haven’t been paid and you can’t collect the money, you may be able to write off these amounts as bad debts.

This means you can deduct the value of these unpaid invoices from your taxable profits, which can help ease the financial impact of those lost payments.

Staff-related costs

If you have staff, there’s a lot you can deduct to trim down your taxable profits. Salaries, wages, and health insurance are big ones, but don’t forget the small stuff too – certain trivial benefits like a bottle of wine at Christmas or gift vouchers worth up to £50 are deductible and great for boosting morale.

If you’re thinking about how to hire employees, remember that investing in their training is a smart move. The benefits of training employees are huge, and training courses are also tax deductible. This way, you not only build a more skilled and motivated team but also enjoy some nice financial perks.

You can even splash out on an annual party for your team, with up to £150 spend per head tax deductible.

Everyday costs

Another easy way to cut down your tax bill is by keeping track of everyday costs and equipment. Small business expenses like stationery, office supplies, or coffee for your team might not seem like much, but they really add up over time.

By keeping a close eye on these small costs, you can make sure they help lower your taxable profits. It’s a simple yet effective way to manage your finances better.

Expenses for running a business from home

If you’re working on business ideas from home, many of the tax deductions discussed in this guide still apply. For instance, if you run an online store as a home-based business, you can deduct the cost of stock and advertising. Just keep in mind that, like any business, staying organised is vital.

Running a home-based business as a sole trader or a business partnership without limited company partners for at least 25 hours each month means you can use the simplified expenses scheme to calculate some of your business costs.

This optional scheme lets you claim a flat rate for expenses like rent and utilities based on the number of hours you work from home each month: £10 per month for 25 to 50 hours, £18 for 51 to 100 hours, and £26 for 101 or more hours.

It’s a handy option that makes it really straightforward to knock a little bit more off your tax bill. However, it’s worth noting that the flat rate scheme doesn’t include internet or telephone charges. These must be claimed separately.

How to maximise tax deductions for small businesses

Making the most out of tax deductions is key for any small business owner looking to lower their tax bill. While there’s no magic formula, smart money management and savvy planning can make a big difference. Here are some tips to help you maximise legal tax deductions.

Pay directly from your business account

Make it a habit to use a dedicated business account for all your commercial dealings. Having separate business and personal finances is key to keeping everything clear and avoiding mix-ups when it comes to expenses, making tax returns less of a headache.

Use accounting software

Investing in accounting tools for small businesses makes it easier to track tax-deductible expenses and keep your financial records organised.

Some tools, like VAT for small business software, are quite specific, while others offer additional features to help with tasks like how to do a payroll or producing documents like cash flow statements and balance sheets. It’s worth taking the time to find the software that has all the features your business needs.

Plan your purchases

Timing your purchases can impact your tax deductions. For example, if you expect a higher tax rate next year, consider making significant purchases or investments before the current tax year ends to maximise your deductions.

Let’s say you own a coffee shop and have been eyeing a fancy new espresso machine. Buying it before the tax year ends can help you take advantage of the current year’s deductions, potentially saving you money.

Keep detailed records

Accurate and up-to-date records are vital when it comes to maximising deductions. Track all your expenses meticulously, from everyday costs to larger purchases. A robust bookkeeping for small business routine helps ensure you don’t miss out on any eligible deductions when you work out how much tax you owe.

Consult with a tax professional

If navigating tax deductions feels a bit overwhelming, think about hiring an accountant or tax adviser for your small business. These professionals ensure you’re compliant with tax laws and can often help identify creative tax deductions for small business you may not have been aware of, making sure you’re not leaving any money on the table.

Stay up to speed with tax rules

Tax regulations can change, so it’s important to stay updated on the latest rules and available guidelines regarding what items are tax deductible for small business.

If you don’t plan to hire a tax professional, it’s especially important to regularly review HMRC guidelines to make sure you’re taking full advantage of all the legal tax deductions for small business.

Review and adjust

Set aside time regularly to look over your small business finances and adjust if necessary. Regular reviews help you stay on top of your expenses and ensure you’re consistently optimising your tax deductions, keeping more money in your pocket, and helping your business grow.

Other ways a small business can pay less tax

Small businesses can also claim various tax breaks. Let’s take a look at some of the main ways to save money on taxes.

Business Rates

If you have a physical property for your business, you’re likely to receive a Business Rates bill. As a small business owner, you might be eligible to claim small business rates relief. The schemes vary by location:

England

Small business rates reliefis available for properties with rateable values under £15,000. If the rateable value is under £12,000 and it’s your only premises, you won’t pay Business Rates at all. For values between £12,001 and £15,000, relief decreases gradually from 100% to 0%.

Wales 

Small business rates relief is available for properties with a rateable value under £12,000. Properties valued up to £6,000 get 100% relief, while those between £6,001 and £12,000 receive a tapered tax break. Certain business categories, like post offices and registered childminders, get extra relief.

Scotland 

Scotland’s small business bonus scheme offers 100% relief for single properties valued up to £12,000, tapering to 0% between £12,001 and £20,000. For multiple properties, 100% relief applies if the total value is £12,000 or less. If it’s between £12,001 and £35,000, you get 25% relief on properties up to £15,000, tapering to 0% for values from £15,001 to £20,000.

Northern Ireland 

Small business rates relief in NI offers a 50% reduction if your business property has a value of £2,000 or less. For properties valued between £2,001 and £5,000, there’s a 25% reduction, and for those between £5,001 and £15,000, a 20% reduction.

Retail, hospitality, and leisure relief

If you’re running a retail outlet, restaurant, café, pub, bar, music venue, cinema, or hospitality and leisure business in England or Wales, you might be eligible to claim retail, hospitality and leisure relief.

This gives you 75% off your business rates for the 2024 to 2025 tax year in England and 40% in Wales, up to a maximum of £110,000 per business per year.

If you employ staff

If you’ve put together a team to help you run your business, there are several ways to save on the related taxes. For instance, employment allowance lets some employers cut their National Insurance liability by up to £5,000 a year. Plus, your business may be eligible for further support if you hire an apprentice or a veteran.

VAT

Registering for VAT sits outside the legal requirements for starting a small business, although you will be obliged to register if you sell more than £90,000 of VAT-taxable goods and services in any 12-month rolling period. It’s important to note you don’t need to wait to hit this VAT threshold before you sign your business up.

Being registered for VAT means a bit more paperwork but it offers several perks too – like boosting your business’s credibility and unlocking new business opportunities. Crucially, as a VAT-registered business, you can reclaim the VAT you pay on products and services.

Corporation Tax reliefs

HMRC offers various tax breaks for limited companies. For example, if your company has developed something new, you could qualify for research and development (R&D) tax relief.

If you’re working in television, theatre, film, animation, or video games, your business could be eligible to claim creative industries tax relief (CITR). There are several schemes available, so be sure to check if any suit your business.

Disclaimer: The contents of this page are intended for informational purposes only and should not be construed as professional advice. For matters requiring legal or financial expertise, it’s recommended to seek guidance from qualified professionals.