Tax rates, allowances and amounts Tax reliefs
Some payments you make during the tax year can be deducted from your gross income before you take away your personal allowance, to arrive at a figure known as taxable income. This process is known as tax relief. The main types of expenditure are covered briefly below.
Tax relief is given on all pension contributions, up to the amount of your earned income for the year, subject to a lifetime cap, but relief is given differently depending on what type of pension you have:
Employer’s pension schemes
If you belong to an employer’s pension scheme, in most cases your pension contribution will be deducted from your salary before tax is calculated. This means you get full tax relief on your contribution at your highest rate of tax straight away.
Personal and stakeholder pension schemes
If you pay into your own personal or stakeholder pension, you claim tax relief differently.
The premium you pay is net of basic-rate tax and your pension provider claims the balance from HMRC.
In 2012-13 and 2013-14, the basic rate of tax is 20%, so if you pay £100 a month into a stakeholder pension, your pension provider will claim a further £25 from HMRC, making the total amount paid into your pension £125 a month.
If you are a higher-rate taxpayer, you will need to claim relief for the additional 20% tax through your tax return.
If you do not pay tax, you can still contribute to a personal pension scheme and benefit from tax relief at 20% on the first £2,880 you contribute net each year (£3,600 gross).
Gifts to charity
Gifts made through a payroll giving scheme are deducted from your income before tax is deducted. This means you receive full tax relief on your gift immediately.
Gifts made through the Gift Aid scheme are paid net of basic rate tax, and the charity reclaims the balance direct from HMRC.
Donations to charity
Individuals who donate certain assets to charity benefit from income tax relief on the full market value of the gifts.
The gifts that qualify for tax relief are:
- Listed shares and securities.
- Unlisted shares and securities dealt on a recognised stock exchange, such as the AIM (alternative investment market).
- Units in authorised unit trusts.
- Shares in open-ended investment companies (OEICs).
- Holdings in certain foreign collective investment schemes.
- Any freehold or leasehold property, provided the whole interest is given. Tax relief is given on the market value of the property at the date of the gift.
Interest payments on qualifying loans
Certain interest payments can be deducted, but the purpose of the loan must be 'qualifying' for the interest payment to be tax deductible.
Other loans that normally do qualify are:
- A loan taken out to purchase shares in the borrower's company or to finance loans to the company, provided that, generally speaking, that company is not an investment company.
- A loan taken out to make an investment into certain types of partnership.
- A loan taken out to buy plant and machinery for use in a trading, professional or property partnership’s business.
- A loan taken out to pay inheritance tax.
Provided the relevant conditions are met in each case, you can deduct the gross amount of interest paid during the tax year on the loan from your income before tax is applied. This has the effect of reducing the amount of income you pay tax on.