Income tax allowances and reliefs let you reduce the amount of income tax you have to pay. Income tax allowances and reliefs can apply to income from employment, self-employment, savings and investment, and property income
Some allowances and reliefs will automatically be applied by HM Revenue & Customs when you submit your tax return. But in other cases you need to make sure you are claiming the right tax allowances and reliefs to minimise your tax bill.
Personal income tax allowances
The most important tax allowance for most individuals is the personal allowance. This gives most individuals a tax-free allowance of £12,570.
The personal allowance is less generous for individuals with a very high income. The personal allowance is reduced by £1 for every £2 that your 'adjusted net income' is over £100,000, falling to zero for an income over £125,000. Adjusted net income is based on your taxable income, but after deducting reliefs like pension contributions.
GoSimpleTax makes your self assessment tax return quick and easy, helping you figure out which expenses and allowances you can claim.
You may be entitled to additional allowances:
- If your spouse (or civil partner) earns less than the personal allowance, and you only pay tax at the basic rate (ie your income is not too high), your spouse can transfer up to £1,260 of their personal allowance to you. This marriage allowance is worth up to £252 (ie £1,260 at 20% tax).
- The details are slightly different if you pay Scottish income tax. You can be eligible for the marriage allowance if you pay tax at the starter, basic and intermediate rates (but not the higher rate or top rate).
- If you or your spouse were born before 6 April 1935, you claim the more generous married couple's allowance instead.
- If you or your spouse are registered blind, you can claim the blind person's allowance. This gives you an extra £2,600 in 2022/23 of tax-free income. The allowance can be transferred to your spouse if you do not use all of it.
Interest and dividend income allowances
There are additional allowances for interest on savings and any dividends you receive.
If you pay basic rate tax, a personal savings allowance allows you up to £1,000 of interest tax-free:
- £1,000 if you only pay tax at the basic rate;
- £500 if you pay tax at the higher rate;
- £0 if you pay tax at the additional rate.
If you have a relatively low income (excluding interest), you also qualify for the 'starting rate of savings'. This means that the first £5,000 of savings interest above your personal allowance is tax-free. This benefits people with low incomes but large savings, such as some pensioners.
- If your income is below your personal allowance (£12,570, or £15,170 if you also claim the blind person's allowance), you can receive up to £5,000 of savings interest tax-free.
- This reduces by £1 for every £1 of income above your personal allowance. For example, with an income (excluding savings) of £14,500 and a personal allowance of £12,570, you have a reduction of £1,930, leaving you with an allowance of up to £3,070 of interest tax-free.
- There is no starting rate of savings if your non-savings income is above £17,570 (or £20,170 including blind person's allowance).
There is a separate £2,000 dividend allowance if you receive company dividends. This includes any dividends from a company that you control – for example, if you have your own business as a company.
Any interest payments or dividends you receive from ISAs (Individual Savings Accounts) are not taxable. They do not have to be included in your self assessment tax return. Dividends from shares in a Venture Capital Trust are also tax-free.
Other income tax allowances
If you earn income from property or from trading, you may want to claim property and trading allowances.
- The trading allowance gives you up to £1,000 of tax-free income for income from self-employment as a sole trader or casual work. You cannot claim the allowance for income from a partnership.
- If you have significant business expenses, you may be better off claiming these as allowable expenses instead. You cannot claim allowable expenses and the trading allowance.
- The property allowance gives you up to £1,000 of tax-free income from renting out property or land (excluding renting out part of your home).
- You can earn up to £7,500 tax-free from letting out a room in your home under the Rent a Room Scheme.
Personal income tax reliefs
Your tax liability can be reduced by a variety of tax reliefs.
The biggest of these for many people is tax relief on pension contributions. You can contribute up to £40,000 a year, provided your contributions are no higher than your earnings. There is a lower allowance for very high earners, or if you are already taking money from a pension.
If your pension contributions are deducted by your employer and you only pay basic rate tax, you normally get this tax relief automatically. Otherwise you need to claim the relief through your self assessment return.
You can also get tax relief on:
- donations to charity made using gift aid or payroll giving;
- some investment in unlisted companies using investment schemes such as the Seed Enterprise Investment Scheme (SEIS);
- a limited amount of maintenance payments to a former spouse, but only if one of you was born before 6 April 1935.
Other tax reliefs may also be available for income from employment or self-employment (see below).
Tax reliefs for self-employment
There is a wide range of reliefs that the self-employed can claim to reduce their overall tax liability. These include:
- Allowable expenses. Most legitimate business expenses can be set against trading income, though there are some exclusions such as entertainment and capital expenditure.
- Simplified expenses. You can choose to claim flat rate expenses rather than actual costs for vehicles, working from home or if you live at your business premises.
- Capital allowances. These allow the entire cost of most purchases of business assets (such as equipment) to be set against income, up to an Annual Investment Allowance of £1 million until 31 March 2023. A proportion of expenditure above this limit can be set against tax annually.
- You can claim the £1,000 trading allowance instead of other allowances.
- Trading losses can be set against other business income using various reliefs.
- Overlap relief may be available if you change your accounting date or cease trading.
- Special reliefs can apply for farmers, market gardeners, foster carers, barristers, authors and artists
You may want to take advice from your accountant. This can be particularly helpful if you want to maximise the value of trading losses, change your accounting period or cease trading.
Tax reliefs for employees
You may be able to claim tax relief as an employee if you have to spend your own money on work-related expenses. You cannot claim any expenses which are already covered by your employer.
- If you use your own vehicle or bicycle for work and your employer pays you less than the HMRC approved mileage rates, you can claim the difference.
- You can claim for business travel, food and hotel expenses. This does not normally include travelling to and from work.
- You may be able to claim for maintaining or replacing (but not initially buying) clothing and tools needed for your work. This includes uniforms and protective clothing, but not ordinary clothes worn at work.
- You may be able to claim the cost of substantial equipment (such as a computer) needed for your work. You cannot claim for buying a vehicle or bicycle.
- You can claim for fees paid to approved professional bodies relating to your work.
- If you have to work from home, you may be able to claim some of the costs. This does not apply if you choose to work from home.