What is a Deductible?

Doing business invariably incurs costs. In the UK, as in other countries, companies pay tax based on their profits rather than their turnover or revenue. This means that many of the costs associated with business operations can be deducted from the amount the company pays in tax.

What is a deductible?

A deductible, also known as a tax-deductible, tax deduction or tax write-off is a singular cost or expense that offsets the profits a company makes. A deductible can be virtually any business expense that a company lists on its tax return and can lower the amount of tax that the business pays after the financial year has ended.

Deductible costs are taken from the company’s gross income to determine its taxable income. They can be deducted both from corporation tax for limited liability companies and partnerships, and income tax for sole traders.

Deductible examples

Deductibles for businesses are far-ranging, often including essential business costs like:

• Office rent

• Utilities

• Equipment, machinery and plant

• Business travel

• Business insurance premiums (e.g. public liability insurance, employee health insurance etc.)

• Employee uniforms

• Feeding and entertaining employees

• Company vehicles

The HMRC’s rules about what costs can and cannot be claimed vary slightly depending on the company’s structure.

Incorporated companies

Incorporated companies can claim allowances and relief on their corporation tax. The government’s website has detailed information about deductibles for corporation tax. These deductibles are called capital allowances and can be claimed for costs pertaining to equipment, machinery and fleet vehicles such as cars, vans and lorries used in regular business operations.

These are different to employee benefits which are costs pertaining to:

• Employee health insurance

• Travel and entertainment expenses

• Childcare facilities

• Company cars

Incorporated companies may also claim tax relief for costs associated with:

• Research and development

• Generating goodwill

• Trading losses

Sole traders

Self-employed sole traders can also claim against costs associated with doing business. These are listed on the tax return submitted every year to HMRC. Guidelines state that sole traders can claim the following costs as deductibles as long as they are directly related to their business operations:

• Office and premises costs (rent, stationary and bills)

• Travel costs (these include train and bus fares, fuel or parking)

• Clothing expenses (for uniform only)

• Cost of employing staff or subcontractors

• Insurance

• Bank charges

• Business rates

• Training and development

Deductibles in business insurance

Business insurance companies will use the term ‘deductible’ differently. In this context, your deductible is the excess that you will pay upfront when making a claim before your insurance or coinsurance provider pays the rest.

What expenses are non-deductible?

Some business costs are non-deductible, and cannot be added to business expenses on a tax return. These include:

• Legal fees (from obtaining loans, patents or registering trademarks)

• Costs from entertaining clients or prospects

• Any fines incurred (e.g. parking fines)

• Charitable donations not made via Gift Aid

• Dividend payouts made to the company director

Deductible FAQs

Is my business insurance tax deductible?

Most forms of business insurance are allowable as tax deductibles. This includes health insurance, although this also comes with tax obligations. This is an employee benefit, so employees pay tax and national insurance (NI) premiums.

Can I claim business dinners as tax-deductible?

That depends on who attends. While business dinners for employees (e.g. Christmas parties etc.) are deductible, business dinners to entertain clients and prospective clients are not.

Can I claim a company car as tax-deductible?

Cars that are part of a fleet and integral to core business operations are classed as capital allowances. Outside of this, company cars are classed as employee benefits and are subject to different rules.