What does tax deductible mean?

Published by Jonathan Ford on

What does “Tax Deductible” mean? The answer seems poke-in-the-eye obvious.

Spend money on stuff and you can deduct what you’ve spent from your tax bill. Right? Wrong.

Tax deductible means you can deduct it from the amount you’ve earned before working out how much tax you owe.

For example, Theo has estimated his tax bill will be £1,000.  He is a basic rate tax payer paying tax at 20%.  He decides to spend £250 on a book cover design.  The £250 is “tax deductible” so he’ll save £250 x 20% = £50 in tax.  If Theo was hoping the whole £250 was coming off his tax bill he might be disappointed.

How much tax will a “tax deductible” item save?

Oh dear.  I hate saying “it depends” with a passion. But… it depends. Sorry.

To work out how much tax buying something will save you need to understand a bit about marginal tax rates. “Marginal tax rates” does sound as dull as ditch water but it’s easy – and important – to understand.

Tax is charged at different rates depending on how much you earn.  This can vary from 0% to over 60%.  If Theo was a higher rate tax payer then he’d have saved 40% x £250 = £100 in tax on the book design.  That’s a glorious twice as much tax saved.  It might even influence his decision as to whether he chooses a different, more expensive designer.

The table below shows approximate marginal rates of tax (the real figures are so intricately woven I’d go dizzy trying to explain them).

IncomeMarginal Income Tax Rate
0 – £12,5000%
£12,501 – £50,00020%
£50,001 – £60,00066% (assuming 2 children and getting Child Benefit)
£60,001 – £100,00040%
£100,000 – £125,00060%
£125,001 – £150,00040%
£150,001 +45%

Thanks for explaining “marginal tax rates”. So what?

You can use marginal tax rates to save you tax.  It needs some thought.  And planning. And information. But, hey, we can help with that.

Some expenditure is discretionary as to when you spend it.  That shiny new laptop? You can choose when to buy it and how much tax you save as a result.  If you know that you’ll have a high marginal rate of tax next year then you could delay your purchase.  Or, if you think your marginal rates will be lower next year accelerate buying something to benefit this year.  This isn’t just a timing difference of cash flow.  It’s real money you would be saving.

We’ve a whole page of ideas for tax deductions for writers if you’re in need of inspiration.

Categories: Tax