What is tax relief?
Tax relief allows you to deduct some payments you make during the tax year from your gross income, so there’s less for you to be taxed on.
You can claim tax reliefs in addition to any personal tax allowances that you are entitled to, which essentially means you’ll take home more of your income, and pay less tax.
This guide explains which tax reliefs are available, how they work and whether you’re eligible to receive them.
- Get a head start on your 2017-18 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.
How tax relief works
There are certain payments you make – whether you’re paying money to someone else, paying back a loan or paying into your pension – that can be made tax-free.
As tax is automatically taken from your income, you can either arrange with your employer to make payments before this tax is deducted from your salary – therefore saving on tax as you’ll have a reduced remaining salary to pay tax on.
Alternatively, tax can be claimed back from HMRC afterwards, as is the case if you make a charitable donation and opt for Gift Aid.
Tax relief on pension contributions
The video below illustrates how tax relief on pension contributions works.
The tax relief is available on contributions up to 100% of your annual earnings – i.e. if you earn £30,000 a year, you can get tax relief on up to £30,000 paid into your pension in a single tax year.
However, the maximum contribution you can earn tax relief on in a year is £40,000. This is called the annual allowance.
The rules are slightly different if you earn more than £150,000. Your maximum contribution is reduced by £1 for every £2 you earn over this amount, until you hit a 'floor' of £10,000. This would be the case for anyone earning £210,000 or more.
Find out more in our guide to the pensions annual allowance.
Tax 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 2018-19, 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 in to 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).
Use our Pension Tax Calculator below to see how much tax relief you could claim.
Tax relief on charitable donations
Some employers offer a charitable giving scheme through payroll, where you can make donations and have them deducted from your salary before it’s taxed.
This means you receive full tax relief on your gift immediately.
Not only does this mean you can make regular charitable donations, not paying tax on them means you’ll be able to afford to give more money and will pay less tax on the reduced salary you receive after the donations have been deducted.
When you opt to make a donation through the Gift Aid scheme, your donation is net of tax, which means the charity can reclaim an additional 20% of the balance directly from HMRC.
Say you pay £100 to charity. You'd have to earn £125 gross pay in order to have £100 in your pocket after tax. So when you make your donation, the charity can claim back the 20% tax, and receive £125.
In practice, this means charities receive 25p for every £1 you donate.
Higher-rate taxpayers, who pay 40% tax, can claim the additional 20% tax relief either through their tax return or by contacting their tax office.
Donations to charity
Anyone who donates certain assets to charity will 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
- For the above, tax relief is given on the market value of the property at the date of the gift.
Tax relief on qualifying loan interest payments
When paying back certain types of loans, you can get tax relief on the interest payments you make.
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.
For instance, if you pay £5,000 in interest payments on a loan you’ve taken out, and you earn £30,000 a year, you’d deduct the £5,000 from your salary so you only pay tax on £25,000.
If you’re a basic-rate taxpayer in this scenario, the tax you pay on your income would be reduced by £1,000.
Tax relief: your questions answered
What tax relief can I claim as a landlord?
If you’re renting a room, rather than a whole property, you can take advantage of the Rent-a-room scheme, which means you can earn up to £7,500 a year before tax.
Find out more in our guide to the rent-a-room scheme: letting a room in your home
As a landlord, you can claim ‘replacement of domestic items relief’ – this covers the replacement of items such as beds, carpets, crockery or cutlery, curtains, sofas and fridges, washing machines and other white goods.
You can only claim for a like-for-like replacement, the cost of which can be deducted from your income tax profit for the year.
We explain this fully in our guide to landlord expenses and allowances.
There have been significant changes to how buy-to-let mortgage interest tax relief works. In 2018-19 tax year, you can claim 50% of your mortgage tax relief. This is set to reduce to 25% in 2019-20.
For more, see our guide: buy-to-let mortgage interest tax relief changes explained.
Can tax relief be backdated?
Yes, in most cases tax reliefs can be backdated up to four years.
Can I claim tax relief on maintenance payments?
It’s possible to claim Maintenance Payments Relief – worth 10% of the maintenance you pay up to a maximum of £326 a year - on maintenance payments made to an ex-spouse or civil partner if all of the following apply:
- Either of you were born before 6 April 1935
- You’re paying maintenance under a court order after the relationship has ended
- The payments are for the maintenance of your ex-spouse or former civil partner (if they aren’t now remarried or in a new civil partnership) or for your children who are under 21.
Can I claim tax relief for travelling to work?
If you drive to work, you can’t claim tax relief for travelling from your home to your usual place of work.
You may be able to claim on journeys to a temporary workplace, or if you’re travelling elsewhere for business. This is subject to the HMRC rate of mileage allowance.
Find out more in our guide to tax-deductible expenses
If you commute using public transport, your employer may offer a season ticket salary sacrifice scheme, where you’ll pay in monthly instalments from your pre-taxed salary.
Can I claim tax relief on professional subscriptions?
Fees and subscriptions to some professional bodies are eligible for tax relief – HMRC has published a list of all such approved subscriptions.
You can’t claim back fees or subscriptions for:
- Lifetime membership subscriptions.
- Fees or subscriptions you haven’t paid for yourself – for example, if your employer has paid for them.
Is there tax relief for when you’re married?
The marriage allowance and married couples allowance are both schemes that allow tax relief to be shared between couples who are married or in a civil partnership.
Married couples allowance is only for those where one or both spouses is born before 6 April 1935.
Marriage allowance is for couples where one partner who earns below the personal allowance of £11,850, donates 10% of it to their partner – who must be a basic-rate taxpayer.
The higher earning spouse receives a tax credit, which reduces the amount of income tax they pay.
Can I get tax relief for childcare?
There are currently two schemes for claiming tax relief for childcare – the childcare vouchers scheme, which is available until October 2018.
This is a salary sacrifice scheme offered by some employers, where part of a parents’ salary is swapped before tax for vouchers to spend with approved childcare providers.
Tax-free childcare is a newer government scheme, where working parents can claim up to £2,000 a year per child to pay into an online childcare account.
Find out more in our guide to tax-free childcare vs childcare vouchers
What tax relief can I claim as a self-employed person?
If you’re self-employed, you’re able to to claim expenses on things you have to pay for in order to run your business – from office supplies to costs for running a business premises or facilities for working from home.
Our guide to self-employed: tax allowable expenses includes the full range of expenses you can deduct from your tax bill
If you’re registered for VAT, you can also claim the VAT tax you pay on certain items – most items have a VAT of 20% - from HMRC through your VAT return.
Our guide to self-employed VAT returns explains how VAT works, how to register and how to make a VAT return.
Get expert buy-to-let mortgage advice
Before taking out a buy-to-let mortgage, it can be helpful to talk to a professional adviser. For impartial advice on the best mortgage for you from an expert who doesn't work on commission, call Which? Mortgage Advisers on 0800 197 8461 or request a call back using the form below.