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What is tax relief?

The government offers businesses a number of initiatives to help reduce income tax payments. Some are universal tax cuts, while others are targeted deductions. Keep reading to find out what is tax relief, and how you can use these deductions to minimise your tax bill.

Tax relief meaning

The tax relief meaning refers to any government policy designed to reduce tax payments. Examples include deductions, credits, exclusions, and tax-free allowance thresholds. Any tax relief is designed to reduce the liability of a business or individual, or to provide assistance to a particular group in need.

Income tax allowances and reliefs apply to all types of income, from property revenue to employment and self-employment earnings. There are also tax reliefs designed for savings and investment income.

Types of income tax allowances

One potential type of tax relief meaning pertains to income tax allowances. For example, individuals receive a personal income tax allowance with a threshold of £12,500. Any income earned up to this threshold is tax-free. However, if you are a high earner, it impacts the personal allowance at a rate of £1 for every £2 that your adjusted net income is over £100,000.

Interest and dividend income allowances give investors some tax relief. These forms of relief include the personal savings allowance of up to £1,000, as well as the separate £2,000 dividend allowance. The dividend allowance is applicable to any dividends, including those earned from controlling your own business.

Property and trading allowances offer further options, applicable to those who earn income from trading or property. The trading allowance offers up to £1,000 of tax-free income from self-employment or casual work. Similarly, the property allowance offers up to £1,000 of tax-free income from renting out land or property. This is separate to the Rent a Room Scheme, which allows an additional £7,500 of tax-free income provided you’re letting out a room in your own home.

Individual savings accounts (ISAs) provide a fourth type of tax relief. These tax-free savings vehicles allow users to receive interest payments or dividends.

Types of income tax deductions

Aside from these allowances, tax reliefs typically refer to income tax deductions. Listing income tax deductible expenses on your tax return offers a way to reduce overall liability.

Personal income tax reliefs include deductions on things like the following.

  • Pension contributions: Contribute up to £40,000 per year without paying tax. This may be automatically deducted by your employer, otherwise you’ll need to claim your tax relief through a self-assessment return.

  • Charity donations: Use payroll giving or gift aid to take advantage of these income tax deductions.

  • Investment schemes: Government schemes like the Seed Enterprise Investment Scheme (SEIS) allow you to gain tax relief when investing in certain types of start-up companies.

Apart from these personal income tax reliefs, there are a number of income tax deductible expenses for businesses and the self-employed. These include:

  • Allowable expenses: These include most reasonable business expenses, which can be used to offset your trading income.

  • Simplified expenses: You can opt to claim your expenses as a flat rate, which is useful if you work from home.

  • Trading losses: Any losses for the accounting period can be offset against your business income as part of tax relief.

  • Capital allowances: Business assets can be written off under capital allowances, up to a fixed annual investment figure.

Employees working for a larger company also have the option of claiming certain income tax deductible expenses. Examples include:

  • Business travel, hotel, and food expenses

  • The cost of using your own bicycle or vehicle for commuting

  • Expenses related to maintaining or replacing tools and uniforms needed for work

  • The cost of substantial equipment, such as electronics

However, employees cannot claim these tax reliefs if they’ve already been deducted by the employer.

How to claim income tax deductions and reliefs

In many cases, it couldn’t be easier to figure out how to claim income tax deductions. Most tax reliefs are automatically applied to your return, though in some cases you will need to write to the tax office. When in doubt, consult the HMRC website. Whether claiming a deduction, allowance, or other type of relief, it’s vital to keep accurate records for your business.

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