Tax deductions? Oh, the joys of HMRC!
It can be a real challenge to understand what is a tax deduction and what is not. Even the most well intentioned people are intimidated and afraid they’re going to make a mistake as there are so many grey areas. So, here’s how to maximise your tax deductions, legally in simplified terms.
#1 – Understand the difference between a business expense and a capital expense
Business expenses are expenses incurred doing business. They’re usually tax deductible and include things like rent, travel and contractors and employees. Capital expenses are the cost of purchasing assets, for example a computer to run your business by or a car to deliver products or services.
These don’t qualify as a tax deduction or business expenses if you use traditional accounting, but are if you use cash basis accounting. If you use traditional accounting you can deduct them by depreciating them over time. I know, it can be so confusing! HMRC offers guidelines for how to depreciate certain items and you can find the details here.
#2 – Understand the difference between personal and business expense
Strictly speaking you cannot deduct personal expenses. However, some expenses are used both for business and personal, so are indeed tax deductions. A mobile phone, for example, or your home internet connection are often combined business and personal expenses and you can deduct the business use as an expense. Determine the percentage of business expense and deduct that.
#3 – You can deduct your home office
If you use part of your home for business, you will be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation and are based on a percentage. This percentage is determined by calculating how much of your home expenses are used solely for business use.
Notice the word I used ‘solely’ you must use your home office regularly and exclusively. That means if your children use your office to do their homework, you’re unable to deduct it. You must also be able to show that your home office is your principal place of business.
#4 – Travel, Meals and Marketing
All business-related travel expenses can be deducted including vehicle insurance, repairs and servicing, train, bus, air and taxi fares, as well as all meals, if you are staying and working away from home. You cannot however claim for travel between home and work.
You can also claim for advertising and marketing costs and also subscription costs for magazines if they relate to your area of business.
#5 – Employees and Contractors
You can deduct the pay and bonuses you give your employees. And money you pay contractors and freelancers. Yes, if you use the services of Virtuoso-PA the money you pay me will be classed as a tax deduction.
#6 – Interest
This is a good one if you’ve funded your business with credit or a loan. You can deduct the interest charged to you. This is why it’s important to keep business and personal finances separate and to keep all receipts and statements.
#7 – Retirement Plans
You can deduct the money you invest in your retirement account, depending on the amount you invest and how you invest it. This is long and lengthy so it’s best to check the details on the Gov.UK website
#8 – Insurance
You can deduct the cost of insurance for your business and this includes the cost of health insurance.
#9 – Business-Related Education
These expenses can be deducted. For example, seminars, classes, educational materials and conventions.
#10 – Subscriptions to industry publications and organisations
If you subscribe to industry publications, these can be deducted. And if you belong to any industry organisations, these too can be deducted.
It pays to stay on top of what you can and cannot deduct from your taxes. While maximising tax deductions is the goal, you also want to make sure you’re operating within HMRC guidelines. If you have any questions, or are puzzled by tax deductions seek help from the HMRC website or a certified tax accountant as the rules can and do change, often.
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