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How do Business Expenses Reduce Tax?

Blog

Jun 2020

Are expenses getting you down? There's a huge amount to manage and consider; and everyday costs (even on the necessities) can cause the happiest spenders to cringe. Once these expenses start to build up - and they certainly will - a lot of time and energy can be wasted on looking for cost-cutting loopholes and money-saving strategy changes. However, it doesn’t need to be this way.

In this blog we’ll answer the question “how do business expenses reduce tax?”, so you can spend less time googling and scrolling, and more time focussing on growing your business.

What counts as a business expense?

Business expenses are essentially any necessary, ordinary and reasonable expenses that play a part in bringing a business income. Officially referred to by gov.uk as “allowable expenses”, there are a many costs that could be considered as a business expense. For example:

Office costs
Travel costs
Clothing expenses
Financial costs
Cost of business premises
Advertising/marketing
Training courses
Charitable donations
Entertainment expenses

Basically, allowable expenses cover any cost that was incurred “wholly and exclusively” for running your business - whether they be for everyday purposes or to attract future work.

How do “tax deductible” expenses work?

So, when it’s time for you to file your earnings annually with HMRC, this is when business expenses become really important. This process is a lot less of a headache if your finances are in order with the most efficient systems available to you. This way, you can easily access your allowable expenses. You then simply add these up and declare, so they can be taken away from your turnover, meaning you’ll only pay tax on the remainder - your taxable profit.

OK, information overload? Let’s put this into practise:

Say your annual turnover is £150,000, and you add up £65,000 of allowable expenses…