Income tax allowances and reliefs can be set against your taxable income, reducing your income tax liability from self-employed business profits or even from employment income
Your allowances and reliefs include allowable expenses which you can set against your taxable profits.
Allowable expenses if you are an employee
You may be able to claim tax relief via your tax return if you have paid for travel, professional fees and subscriptions or things that you need for work purposes only. The rules around what can be claimed are very restrictive. For example, if you voluntarily work from home you can’t claim relief on any home expenses. You can’t claim if your employer has reimbursed you or provided an alternative allowance.
For detailed information see HMRC tax relief for employees.
Allowable expenses if you are self-employed
If you are self-employed, allowable expenses can be set against your business income to reduce your taxable profits.
Allowable expenses include most day-to-day business expenditure. The costs of supplies, employees' wages, renting premises, financing costs and so on are all normally allowable expenses. There are a few specific exclusions - such as entertainment expenses. There are also special rules which enable you to choose how to claim some types of expenditure, such as motoring expenses which can be claimed by either deducting the actual cost incurred or using fixed mileage rates.
Allowable expenses can included a proportion of expenditure which is for both business and private purposes if you’re self-employed. For example, work out what share of your home telephone bill relates to business use and claim that proportion as an allowable expense.
Capital expenditure on buying or improving assets such as equipment and premises is not treated as an allowable expense. Instead, you may be able to claim capital allowances - typically for the cost of plant and machinery. In some cases these allow you to set the entire cost against your taxable profits in the year of purchase. Purchases of cars and higher levels of capital expenditure may need to be gradually set against tax by claiming a writing-down allowance each year.
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Income tax allowances
The key income tax allowance is the tax-free personal allowance. This means that no tax is charged on the first £11,500 (2017/18) of your total income. You may be able to claim additional allowances if you are blind, born between 6 April 1938 and 5 April 1948, born before 6 April 1938, or are married or in a civil partnership and at least one of you was born before 6 April 1935. See the HMRC table of personal allowances and rates.
Since 6 April 2016, the first £5,000 of dividend income is tax-free (no matter what other non-dividend income the recipient has). Under the Dividend Tax Allowance, any dividend income over £5,000 will be taxed at either 7.5% (for basic rate tax payers), 32.5% (higher rate tax band) or 38.1% (additional rate band). Although the first £5,000 of dividend income is tax free, it will still count when calculating whether you are liable to the basic or higher rates of tax on the rest of your income. From April 2018, the dividend allowance will be reduced to £2,000 per year.
Dividends from tax-exempt pension funds and from shares held in an ISA will continue to be tax free.
If you are an employee or company director, your personal income tax allowance may be increased to reflect allowable expenses reported on a previous tax return.
Marriage personal allowance transfer
If your income is £11,200 or less in the 2017/18 tax year, you may be able to reduce your spouse or civil partner's tax by up to £220.
The Marriage Allowance will let you transfer some of your personal allowance to your spouse or civil partner. This is the amount of income you can earn before paying tax. Register on the GOV.UK website to find out if you can claim the Marriage Allowance.
Income tax reliefs
The way in which you obtain income tax relief depends on the type of expenditure. In most cases you simply deduct your allowances or costs from income to reduce your income tax bill. In some instances you get a tax credit repaid to you or tax repaid indirectly such as into a personal pension.
Income tax relief is provided for any pension contributions you make, up to 100% of your earned income subject to a current maximum annual allowance of £40,000. If you are paying into a personal pension scheme, basic rate income tax is reclaimed by the pension provider. Higher rate taxpayers can reclaim the additional tax through their tax return.
Tax relief is also available for any losses your business makes. Depending on the circumstances, these losses can be set against other income or gains in the current year or in previous years, or carried forward to set against future taxable profits.
A few types of business with very variable profits - such as farmers and authors - can claim averaging relief. By averaging out profits for two years, this avoids paying high levels of tax one year and lower ones in another. This can reduce the total amount of higher rate tax payable.
If you cease trading, a special overlap relief may reduce your final tax bill. You may also be entitled to post-cessation relief for additional expenses after you stop trading - for example, if some of your taxable profits turn out to be bad debts.
A few additional personal income tax reliefs may be available to you. These include rent-a-room relief if you have a lodger in your home, and tax relief on gifts to charity. From April 2017, there are two new allowances. It is now possible to earn up to £1,000 from your property without paying tax. For example, income from renting out your driveway or garage. There is also another £1,000 allowance for income earned from occasional jobs such as selling goods or providing services.
Your accountant can advise on what allowable expenses you can claim and what other income tax allowances and reliefs apply to your particular circumstances.