The Truth About Tax Deductions for Small Businesses in UK: Common Mistakes Explained

Tax deductions can reduce your business’ tax bill significantly.

In the UK, small businesses pay Corporation Tax at 19% on profits up to £50,000 and 25% on profits above that from April 2023.

Yet many small business owners miss out on deductions or make costly errors.

HMRC reports that errors in expense claims are a common cause of penalties and investigations.

For example, some miss claiming legitimate costs like home office use or mileage allowances.

Others overclaim on disallowed expenses such as commuting or personal costs.

Getting deductions right can save you hundreds or thousands of pounds each year.

Clear understanding and good record-keeping are essential to avoid penalties and maximize savings.

This article explains the most common misconceptions about tax deductions for UK small businesses.

You will learn how to claim accurately and confidently.

The Myth of the “Magic Deduction” in Tax Deductions for Small Businesses in UK

Many small business owners believe one single deduction will drastically cut their tax bill.

This is not the case in the UK.

Tax deductions add up. No one expense will eliminate your tax liability.

For example:

• Claiming office supplies or staff wages helps reduce taxable profits.

• Even large allowances like the Annual Investment Allowance only reduce profits, not tax owed directly.

  
  

Relying on a “magic” deduction can lead to missed claims or mistakes.

The best approach is to track all legitimate expenses carefully.

Accurate, modest claims build a solid foundation for lowering your tax bill.

Confusing Personal and Business Expenses

A common mistake is mixing personal and business spending.

Using business funds for personal purchases or claiming personal expenses as business costs can cause problems.

This can:

• Lead to invalid deductions.

• Increase the chance of an HMRC audit.

• Create messy financial records.

  
  

To avoid this:

• Open separate bank accounts for your business.

• Only claim expenses that are wholly and exclusively for business purposes.

  
  

Keeping your finances separate makes your tax return clearer and safer.

Overclaiming Disallowed Expenses

Many small business owners try to claim expenses that are not allowed or only partially allowed by HMRC.

Common disallowed or restricted expenses include:

• Client entertainment, such as meals or event tickets

• Clothing that is not exclusively for work (for example, everyday clothes)

• Commuting costs between home and your regular workplace

Claiming these can lead to rejected deductions or penalties.

For example, HMRC does not allow deductions for daily commuting or most client entertainment costs.

To avoid mistakes:

• Review HMRC’s list of allowable expenses before making a claim.

• If you are unsure about a specific expense, seek clarification or leave it out.

Sticking to clear HMRC rules protects your business from unexpected tax bills and audits.

Missing Legitimate Deductions

Many small business owners overlook expenses they are allowed to claim.

Frequently missed deductions include:

• Home office use, if you work from home

• Mileage allowances for business travel in your own vehicle (45p per mile for the first 10,000 miles, then 25p per mile)

• Pre-trading expenses, such as costs incurred before your business started trading

• Professional subscriptions to approved bodies

• Charitable donations made under Gift Aid

Missing these can mean paying more tax than necessary.

To avoid this, use a checklist when preparing your tax return.

Review all expense categories to make sure you claim everything you are entitled to.

Forgetting Capital Allowances

Many small business owners miss out on claiming capital allowances.

You can claim for equipment, machinery, computers, and office tools used in your business.

The Annual Investment Allowance (AIA) lets you deduct the full value of qualifying items from your profits, up to the annual limit.

Some owners think capital items cannot be claimed as expenses. This is incorrect.

If you buy a new laptop for your business, you can claim its cost under capital allowances.

To avoid missing out:

• List all purchases of equipment or machinery during the tax year.

• Check if they qualify for AIA or other capital allowances.

• Keep invoices and records to support your claim.

Using capital allowances correctly lowers your taxable profits and reduces your tax bill.

Poor Record-Keeping and Receipt Management

Weak record-keeping is a common reason for rejected claims and HMRC penalties.

If you cannot support your deductions with proper evidence, your claims may be disallowed.

Best practices include:

• Use digital tools or apps to scan and store receipts.

• Match every expense claim with a receipt or invoice.

• Keep records for at least six years, as required by HMRC.

• Do not rely only on bank statements. They do not show the purpose of each expense.

Strong record-keeping makes your tax return accurate and protects you during an audit.

Ignoring VAT and Its Relationship with Deductions

Many small businesses miss important VAT rules when claiming expenses.

If your turnover exceeds the VAT threshold (£85,000 as of 2025), you must register for VAT.

Once registered, you can reclaim VAT on business purchases as input tax.

But you must:

• Adjust your claims to exclude VAT on expenses you reclaim.

• Keep accurate VAT records and invoices.

• Understand that some costs may not include reclaimable VAT.

Failing to manage VAT correctly can lead to errors in your tax return and penalties.

Monitor your turnover regularly to know when VAT registration is required.

Understanding VAT’s impact helps you claim allowable costs accurately.

Misclassifying Workers and Their Associated Costs

Some small business owners treat employees as contractors to reduce tax and National Insurance costs.

This can lead to serious tax risks, including breaches of IR35 rules.

Incorrect classification may result in:

• Unexpected tax bills

• Penalties from HMRC

• Liability for unpaid National Insurance contributions

To avoid this:

• Use HMRC’s official employment status tools.

• Ensure contracts clearly define the working relationship.

• Pay close attention to the nature of control, substitution, and mutuality of obligation.

Correct classification ensures you claim the right expenses and meet your tax obligations.

Not Considering Payment on Account

Some small business owners forget to plan for payments on account.

If your tax bill is over £1,000, HMRC usually asks you to pay part of next year’s tax in advance.

Missing this can cause:

• Cash flow problems

• Difficulty budgeting for future tax bills

• Underclaimed prepayments

To avoid surprises:

• Check if payments on account apply to your situation.

• Budget for these advance payments, especially if your income changes year to year.

• Keep track of prepayments when preparing your next tax return.

Understanding payments on account helps you manage cash flow and stay compliant.

Smart tax planning goes hand-in-hand with solid financial forecasting, learn more in our guide on “The Importance of Budgeting for Scaling Your Business Efficiently.”

Underestimating the Value of Professional Advice

Many small business owners rely only on accounting software to complete their tax returns.

Software helps organise your records, but it does not replace an understanding of UK tax law.

Some deductions require judgement and knowledge of HMRC rules.

Mistakes can lead to missed savings or unexpected penalties.

To improve your tax position:

• Consider consulting a qualified accountant or tax adviser.

• Use software for structure but seek advice for complex issues or large claims.

• Stay updated on changes to tax rules that may affect your business.

Professional guidance can help you claim correctly and reduce your tax risk.

Conclusion

Most tax deduction mistakes happen because of misinformation, neglect, or assumptions.

Good record-keeping and a clear understanding of allowable expenses are essential.

A careful, proactive approach helps you claim the right deductions and avoid penalties.

Stay informed about HMRC rules and review your claims each year.

Taking these steps can help you save money and keep your business compliant.

Need help reviewing your expense claims or staying on top of HMRC compliance?

Get in touch with AMS Admin Services, our team can help you get your deductions right, keep accurate records, and avoid costly surprises!