Tax relief What is tax relief?

coins

Claiming tax relief for certain types of expenditure can cut your final tax bill.

Tax relief is a reduction in the tax you have to pay. It is given in response to a particular type of expenditure, which is tax deductible. You benefit from this in addition to your personal allowance (the portion of your income on which you do not have to pay tax).

Types of tax relief

The main types of tax relief for individuals are:

  • pension tax relief
  • self-employment tax relief
  • employee tax relief
  • charity tax relief
  • maintenance tax relief

Go further: check your personal allowance to see how much income can you receive before paying tax.

Pension tax relief

Tax relief on pension contributions is an incentive given by the government to encourage people to save into a pension. How it works depends on what type of pension scheme you belong to. The amount of contributions you can claim relief for is restricted to 100% of your earnings or the annual allowance- for 2014-15 (and 2015-16) this is £40,000. Pension savings above this amount receive no tax relief.

If you belong to a defined benefit (DB) scheme in addition to a defined contribution (DC) scheme, the value of your DB benefits could reduce your annual allowance for DC contributions.    

When you start to draw income from a defined contribution (money purchase) pension scheme, your annual allowance for further pension contributions falls to £10,000.   

In 2015, the Chancellor, George Osborne announced that from April 2016, the annual £40,000 allowance will be reduced for anyone earning more than £150,000 a year on a sliding scale. For every £1 you earn over £150,000, the allowance falls by 50p. For those earning £210,000 a year, the allowance will fall to a minimum of £10,000.

Tax relief for workplace pension scheme contributions

If you belong to an occupational, or workplace, pension scheme, your pension contribution is taken from your total (gross) pay, before any tax is deducted. This means that you pay tax on less income than you otherwise would. Your National Insurance contributions are still based on your gross pay.

For a 20% taxpayer, this means that a contribution of £500 a month would cut their taxable income by £6,000. They would pay £1,200 less tax. For a 40% taxpayer, the same contribution would lead to a £2,400 reduction in their tax bill. 

Budget 2016- possible cuts in pension tax relief 

The government is currently reviewing pension tax relief. It has been suggested that the top rates of tax relief could be cut, so that all taxpayers receive only basic tax relief at 20%. 

  • For a 40% taxpayer who pays £20,000 a year into a pension scheme, this could reduce their overall tax relief from £8,000 to £4,000. 
  • Anyone in this position might consider making extra pension contributions before the system changes, although they need to be careful not to exceed their salary for 2015-16. 
  • You must also stay within the annual contribution limit, unless you can carry forward unused allowance from 2012-13, 2013-14 and 2014-15, which can be used to increase the threshold. In 2012-13 and 2013-14 the limit was £50,000, so if you contributed less than this, or less than £40,000 for 2014-15, you might be able to claim extra allowance for 2015-16. 
  • You need to have been a member of a pension scheme during each year for which you claim unused allowance. 
  • Higher rate (40%) taxpayers, will gain an additional 20p for each extra £1 they manage to contribute, so if you paid in an extra £50,000, you'd receive £10,000 in tax relief that may not be available next year.                    

Tax relief for personal pension scheme contributions

If you belong to a personal pension scheme (including a SIPP), you pay tax on your earnings before any contributions are deducted. However, your pension provider can claim back 20% tax from the government. 

This means that if you want to add £100 a month into your pension, you only pay in £80 a month and the pension provider claims £20 a month from the government. If you're a higher rate or additional rate taxpayer, you can claim further relief through your tax return. For a 40% taxpayer, this is the same again as the sum the pension provider receives- so for an £80 contribution they receive a further £20. This is paid in the form of a reduction in their tax bill (claimed via a self-assessment tax return), rather than a further contribution into their pension scheme. Overall, it means that a £100 payment into their pension pot will only cost £60.    

Non-taxpayers who contribute to a personal pension scheme can also get 20% tax relief. This means that to put £3,600 into their pension pot, they will only need to contribute £2,880. They get no tax relief for any contributions over £2,880.

Although contributions paid into a pension scheme receive tax relief, income received from a pension scheme is taxable in the same way as other income.

Self-employment tax relief

If you are self-employed, you can deduct expenses and running costs from your gross income to reduce the amount of your taxable profit. These expenses include items such as travel costs on business trips, heating and cleaning business premises, and the running costs of a car when used for business purposes.

You are also able to claim reliefs for some capital expenditure you incur.
 

Go further: Check what self-employed expenses are tax deductible. 

Employee tax relief

As well as pension tax relief, employees can claim some tax-deductible business expenses, provided they have not already been reimbursed by their employer. These include:

  • business travel and subsistence, including business mileage if you use your own vehicle on business, or fuel you buy when using a company car;
  • tools and specialist clothing, if you have to provide these for your work;
  • household expenses when working at home, such as extra heating and lighting. Capital allowances may also be available for some work-related expenditure;
  • professional fees or subscriptions, if these are helpful for your work and you pay them personally.

Charity tax relief

There are a number of ways that gifts to charity receive tax relief:

  • Gift Aid. This is the best-known form of tax relief on charitable giving. Your donation is treated as if basic rate income tax has already been deducted, and charities (or community amateur sports clubs) can reclaim this from HMRC. If you pay higher rate tax and donate through Gift Aid, you can claim tax back through your tax return;
  • payroll giving. If you donate to charity from your pay or company pension through payroll giving, your contribution is deducted before tax;
  • income tax relief. If you give land, buildings or qualifying shares to charity you can claim income tax relief;
  • capital gains tax relief. If you give assets to charity you can claim capital gains tax relief.

Maintenance payments tax relief

This relief is being phased out, but in some circumstances maintenance payments you make to an ex-spouse or former civil partner can reduce your tax bill. 

To qualify, you or your ex-partner need to have been born before 6 April 1935, so only older people still qualify for the relief. You also need to be making payments under a Court Order and the payments need to be for the maintenance of your ex-partner or children who are under 21. 

The relief will reduce your tax bill by 10% of £3,040 in 2013-14, so £304 or 10% of the payments you've made if this is less than £304.

More on this...

Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.