What are tax deductions?

Published Tuesday 14 July 2026

Table of contents

• What is a tax deduction?
• How tax deductions lower your tax bill
• Types of business expenses you can deduct
• What you can't claim as a tax deduction
• Capital allowances vs business expenses
• How to track your business expenses
• Making Tax Digital and record-keeping
• Simplify your tax deductions with Xero
• FAQs on tax deductions

Key takeaways

• Tax deductions are allowable business expenses that reduce your taxable profit, meaning you pay less income tax or corporation tax to HMRC.
• Common deductible expenses include office costs, travel, working from home costs, professional services, insurance, marketing and staff costs.
• Capital allowances let you deduct the cost of business assets like equipment and vehicles, with the Annual Investment Allowance covering up to £1 million per year.
• From April 2026, self-employed individuals and landlords earning over £50,000 will need to keep digital records and submit quarterly updates under Making Tax Digital for Income Tax.

What is a tax deduction?

A tax deduction is a business expense that you can subtract from your total income before calculating how much tax you owe. In the UK, HMRC calls these "allowable expenses". They're costs you've incurred wholly and exclusively for your trade or business.

If you're self-employed, you report your allowable expenses on your Self Assessment tax return. Limited companies claim them through their corporation tax return. Either way, the principle is the same: deductible expenses reduce your taxable profit, which means you pay less tax.

It's worth noting that not every business cost qualifies. HMRC has specific rules about what counts as an allowable expense, and getting it wrong could mean paying too much tax or facing penalties. You can check HMRC's guidance on allowable expenses for the full details.

How tax deductions lower your tax bill

Tax deductions work by reducing your taxable profit, not your actual tax bill pound for pound. The more allowable expenses you claim, the lower your taxable profit becomes, and the less tax you pay.

Here's a simple example. Say you're a self-employed graphic designer who earned £45,000 in the 2025/26 tax year. You had £12,000 in allowable business expenses, including software subscriptions, a home office, travel and professional indemnity insurance. Your taxable profit would be £33,000.

Without those deductions, you'd pay income tax on the full £45,000. With them, you only pay tax on £33,000. At the basic rate of 20%, that's a saving of £2,400. For higher-rate taxpayers at 40%, the savings are even bigger.

This is why tracking every legitimate expense matters. Small costs add up over the year, and missing them means you're paying more tax than you need to.

Types of business expenses you can deduct

There's a wide range of costs you can claim as tax deductions, as long as they're incurred wholly and exclusively for business purposes. Here are the main categories of allowable expenses for UK businesses.

Office costs

You can deduct the cost of stationery, printer ink, postage and office supplies. Software subscriptions and cloud services you use for your business also count. If you rent office or coworking space, that's an allowable expense too.

Travel and mileage

Business travel costs are deductible, including train tickets, bus fares and flights for work purposes. If you use your own car for business journeys, you can claim mileage at HMRC's approved rates: 45p per mile for the first 10,000 miles and 25p per mile after that. Parking fees and congestion charges for business trips also qualify.

You can't claim for your regular commute between home and your usual workplace. But travel to temporary work locations, client meetings or conferences is allowable.

Working from home

If you work from home, you can claim a proportion of your household costs. HMRC's simplified expenses method lets you claim a flat rate based on the hours you work from home each month: £10 for 25 to 50 hours, £18 for 51 to 100 hours, or £26 for 101 hours or more.

Alternatively, you can calculate the actual proportion of your home costs (rent or mortgage interest, council tax, utilities, broadband) that relate to business use. This takes more effort but could result in a larger deduction.

Staff costs

Salaries, wages, bonuses and pensions for your employees are all deductible. You can also claim for recruitment costs, subcontractor fees and agency staff. Employer National Insurance contributions count as an allowable expense too.

Professional services

Fees paid to accountants, tax advisers, solicitors and other professionals for business purposes are deductible. This includes the cost of preparing your tax return. Trade or professional body membership fees are also allowable, as long as they're relevant to your business.

Insurance

Business insurance premiums are an allowable expense. This covers public liability insurance, professional indemnity insurance, employers' liability insurance and contents insurance for your business premises. You can't claim for personal insurance policies, even if you're self-employed.

Marketing and advertising

The cost of promoting your business is deductible. This includes website hosting, social media advertising, print materials, business cards and directory listings. If you hire a freelance designer or marketing agency, those fees qualify too.

Training and development

Training courses that update or maintain your existing skills are deductible. For example, a web developer attending a course on a new programming language can claim the cost. However, training for an entirely new skill or career isn't allowable under HMRC's rules.

Stock and materials

Raw materials, stock for resale and any goods you use to deliver your services are deductible. A florist can claim the cost of flowers, a baker can claim ingredients, and a builder can claim timber and fixings.

Financial costs

Bank charges, credit card fees, interest on business loans and hire purchase interest are all allowable. If you use a payment processing service, those transaction fees are deductible too. You can also claim the cost of business bank account charges.

What you can't claim as a tax deduction

Some expenses look like they should be deductible but aren't. Knowing what you can't claim is just as important as knowing what you can, so you don't make costly mistakes on your tax return.

• Personal expenses, even if they happen during the working day (like non-business lunches or personal clothing)
• Your regular commute between home and your permanent workplace
• Entertainment costs for clients or suppliers
• Fines and penalties, including parking tickets and late filing penalties
• Political donations
• The personal portion of mixed-use expenses (you can only claim the business proportion)
• The cost of buying capital assets outright (these are handled through capital allowances instead)

If an expense has both a personal and business element, you need to split the cost and only claim the business portion. For example, if you use your mobile phone 60% for business, you can claim 60% of the bill as a tax deduction.

Capital allowances vs business expenses

Capital allowances and business expenses are both tax deductions, but they work differently. Understanding the distinction helps you claim everything you're entitled to.

Business expenses (also called revenue expenses) are day-to-day running costs like rent, utilities and office supplies. You deduct these in full in the tax year you incur them. Capital expenditure covers items that have a lasting value to your business, like machinery, vehicles, computers and office furniture.

Instead of deducting the full cost of a capital item in 1 year, you claim capital allowances. The most common is the Annual Investment Allowance (AIA), which lets you deduct up to £1 million per year on qualifying plant and machinery. For most small businesses, the AIA covers everything you'll need.

Here's a practical example. If you buy a £3,000 laptop and a £200 pack of printer paper, the paper is a business expense you deduct in full this year. The laptop is a capital item; you'd claim it through the AIA or another capital allowance. Both reduce your tax bill; they just follow different rules.

If you're unsure whether something counts as revenue or capital, consider how long it'll be useful. Items that last more than about 2 years are typically capital. Your accountant or tax adviser can help with borderline cases.

How to track your business expenses

Keeping accurate records of your expenses is essential for claiming every tax deduction you're entitled to. Good record-keeping also makes your Self Assessment or corporation tax return much easier to complete.

Use a separate business bank account

If you haven't already, open a dedicated business bank account. Mixing personal and business transactions makes it harder to identify deductible expenses and increases the risk of errors on your tax return.

Capture receipts as you go

Don't wait until the end of the year to sort through a shoebox of receipts. Use a tool like Hubdoc to snap photos of receipts and invoices as they come in. Digital copies are just as valid as paper ones for HMRC purposes.

Reconcile your transactions regularly

Match your bank transactions against your records at least monthly. This catches errors early and ensures nothing slips through the cracks. Cloud accounting software like Xero connects to your bank and automates much of this process, helping save you time and reduce manual mistakes.

Categorise expenses correctly

Assign each expense to the right category as you record it. This makes it straightforward to identify your total deductions at tax time and provides a clear audit trail if HMRC ever asks questions.

Keep records for the required period

HMRC requires you to keep business records for at least 5 years after the 31 January submission deadline for the relevant tax year. For limited companies, you need to keep records for 6 years from the end of the accounting period. Store digital backups to protect against loss.

Making Tax Digital and record-keeping

Making Tax Digital (MTD) is HMRC's programme to move tax administration online. It's already in place for VAT-registered businesses, and it's expanding to income tax next.

From April 2026, self-employed individuals and landlords with annual income over £50,000 will need to keep digital records using MTD-compatible software. They'll also need to submit quarterly updates to HMRC, rather than waiting for a single annual return. The threshold drops to £30,000 from April 2027.

This means you'll need software that can record your income and expenses digitally, categorise them properly and submit the data to HMRC. If you're already using cloud accounting software, you're likely well prepared. If you're still relying on spreadsheets or paper records, now's the time to make the switch.

Even if your income is below the threshold, digital record-keeping makes tracking your tax deductions faster and more accurate. It's a good habit to adopt regardless of whether you're legally required to.

Simplify your tax deductions with Xero

Tracking your tax deductions doesn't have to be a chore. Xero's cloud accounting software connects to your bank, helping you import transactions and categorise expenses as they happen. With Hubdoc built in, you can capture receipts on your mobile phone and store them digitally, so nothing gets lost.

Xero's reporting tools help give you an up-to-date view of your deductible expenses, making it easier to stay on top of your finances throughout the year. When tax time comes around, your records are already organised and ready to share with your accountant or tax adviser. Get one month free.

FAQs on tax deductions

Here are answers to some frequently asked questions about tax deductions for UK businesses.

What is a tax deduction?

A tax deduction is a business expense that HMRC allows you to subtract from your income before calculating your tax. It reduces your taxable profit, so you pay less income tax or corporation tax.

What expenses can I claim as a small business?

You can claim costs incurred wholly and exclusively for your business. Common examples include office supplies, travel, working from home costs, insurance, professional fees, marketing and staff wages.

Can I claim expenses if I work from home?

Yes. You can use HMRC's simplified expenses flat rates based on the hours you work from home, or calculate the actual proportion of your household costs that relate to business use.

What records do I need to keep for tax deductions?

You need to keep receipts, invoices and bank statements that support each expense you claim. HMRC requires you to keep these records for at least 5 years after the relevant Self Assessment deadline.

What's the difference between a tax deduction and a tax credit?

A tax deduction reduces your taxable profit before your tax is calculated. A tax credit reduces the actual amount of tax you owe after it's been calculated, so it's a pound-for-pound reduction.

Do I need an accountant to claim tax deductions?

You don't legally need an accountant, but a qualified tax adviser can help you identify deductions you might miss and ensure you're compliant with HMRC's rules. It's especially useful if your tax affairs are complex.