Making The Most Of Available Tax Reliefs

Sarah Bradford indicates how to make the most of some of the tax reliefs that the tax system has to offer.

The tax system contains a large number of reliefs. In 2011, the office of tax simplification (OTS) identified 1,042 tax reliefs; by 2014, this had increased to 1,140. Of the 2014 reliefs, 267 related to income tax and 120 to corporation tax. 

While HMRC will be very quick to tell a taxpayer when he or she owes them money, they will not rush to tell the taxpayer about reliefs that they could have claimed. 

This article looks at how to take advantage of some of the tax reliefs and allowances available.

Personal reliefs and allowances

An obvious starting point is to ensure that use is made of the various personal reliefs. 

The personal allowance is set at £11,850 for 2018/19 and will increase to £12,500 for 2019/20. The allowance is, however, reduced where income exceeds £100,000; the allowance is reduced by £2 for every £1 by which ‘adjusted net income’ exceeds £100,000. As a result, those whose adjusted net income is more than £123,700 (for 2018/19) have no personal allowance. For 2019/20, the equivalent figure is £125,000. 

There are steps that can be taken to reduce income below £100,000 to preserve the personal allowance. Options include making pension contributions or donations to charity. Those with personal and family companies can review their profit extraction strategies and consider perhaps waiving dividends or deferring salary or bonus payments, as appropriate.

At the other end of the spectrum, those whose income is insufficient to utilise their personal allowance can elect to transfer 10% of their allowance (rounded up to the nearest £10) to their spouse or civil partner. However, this can only be done where the recipient is not a higher or additional rate taxpayer. The ‘marriage allowance’, as this is known, will save a couple tax of £238 (i.e. £1,190 @ 20%) in 2018/19. In 2019/20, the marriage allowance is worth £250 per couple (i.e. £1,250 @ 20%).

Older married couples are able to take advantage of the married couple’s allowance if at least one of them is born before 6 April 1935. The allowance is set £8,695 for 2018/19 (increasing to £8,915 for 2019/20), but is reduced by £1 for every £2 by which income exceeds £28,900 for 2018/19 (increasing to £29,600 for 2019/20). However, the abatement does not reduce the allowance below the minimum level of £3,260 for 2018/19 (or £3,450 for 2019/20).

Basic and higher rate taxpayers can also benefit from savings allowances, allowing them to enjoy tax-free savings income of, respectively, £1,000 and £500 a tax year. There is no savings allowance for additional rate taxpayers.

For business owners, to legitimately reduce your tax bill it is important to make sure that you take into account allowable expenses when working out your taxable profits. Tax relief is available for expenses which are incurred ‘wholly and exclusively’ for the purposes of the business. 

Common expenses include:

• office costs;

• travel costs;

• motor expenses;

• staff costs; 

• cost of goods for resale;

• accountancy and legal fees;

• premises costs, such as rent, electricity, gas;

• repairs; and

• advertising and marketing costs.

The list of allowable expenses will depend on the nature of your business. It is important to keep good business records so that you can identify deductible expenses, and also to keep receipts and invoices etc. as evidence that the expense has actually been incurred. Any expense that meets the ‘wholly and exclusively’ test counts, but make sure to exclude expenses which have a dual purpose that includes a private element and any private expenses. For some expenses, the ‘simplified expenses’ rules can be used to determine the deductible amount. 

For capital expenditure, different rules apply depending on whether the accounts are prepared on the cash basis or the accruals basis, so make sure that you follow the ones that apply to you.

For smaller businesses, the £1,000 trading allowance means that where trading income is less than £1,000, it does not need to be reported to HMRC. Where trading income is more than £1,000, there is the option to deduct this from income and pay tax on the excess rather than deducting actual expenses. This should save work and will be beneficial where actual expenses are less than £1,000. 

Employees can claim tax relief for expenses that they incur in performing the duties of their employment where these are not reimbursed by the employer. 

The test here is strict – the expenses must not only be ‘wholly and exclusively incurred’, but they must also be ‘necessarily’ incurred (which in strict terms means that the jobholder must be obliged to incur that expense). 

It must be remembered that there is a difference between incurring expenses in doing the job and incurring expenses to put oneself in the position to do the job. Home to work travel and childcare fall in the latter category. Expenses for which a deduction may be claimed could include travel and subsistence expenses met by the employee, costs of working from home where required to do so by the employer, and professional fees and subscriptions.

Tax relief is available for pension contributions at the taxpayer’s marginal rate of tax. Relief is available on contributions to the higher of 100% of earnings and £3,600 (meaning contributions can be made on behalf of non-earners). 

This is subject to an annual allowance cap. The annual allowance is set at £40,000 for 2018/19 and will remain at this level for 2019/20. However, the annual allowance is reduced where a person has both ‘threshold income’ (broadly income excluding pension contributions) of more than £110,000 and ‘adjusted net income’ (including employer pension contributions) of more than £150,000. The reduction is £1 for every £2 by which adjusted net income exceeds £150,000 until the minimum allowance of £10,000 is reached. Where the annual allowance is not fully used, it can be carried forward for up to three years.

A reduced allowance (‘money purchase annual allowance’) is available where money has already been taken from a pension pot. It is set at £4,000 for 2018/19 (and 2019/20). If it is not used in the year, it cannot be carried forward.

Making pension contributions can be beneficial from a tax perspective, aside from the pension saving benefits. For example, a higher rate taxpayer will enjoy relief of £4,000 on pension contributions of £10,000. Where an individual is in danger of losing some or all of his or her personal allowance, making pension contributions to reduce income to below the magic £100,000 can pay dividends – the marginal rate of tax in the ‘abatement zone’ is 60%.

Tax relief is available for charitable donations, which is something that is often overlooked. It is very easy to sponsor a friend or support a fundraiser on Facebook, and then to forget about it when it comes to completing your tax return. 

Basic rate tax relief is available under the gift aid scheme, but higher and additional rate taxpayers can claim further relief on the difference between the rate of tax that they pay (i.e. 40% or 45%) and the basic rate (i.e. 20%) – this ensures that relief is given at the taxpayer’s marginal rate. 

As with pension contributions, charitable donations can be a useful tool to reduce income to preserve the availability of the personal allowance.

There are numerous reliefs available, although only a proportion will generally be relevant to an individual taxpayer at any one time. However, it is important to undertake a review to check that you have claimed all the reliefs to which you are entitled. Seek professional advice, if necessary.