UK Income Tax Allowances and Reliefs

Income tax allowances and reliefs reduce the amount of tax a UK individual has to pay. The ones an individual is entitled to claim depends on personal circumstances, employment status and business spending. In this guide, you’ll find the main UK allowances and reliefs you need to be aware of, as well as how you can claim each of them.

Updated 1 November 2021

Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.

1. Personal Allowance

The UK personal allowance entitles UK individuals to earn an amount tax-free every tax year. For 2020/2021, it is £12,570. (Find out the income tax and National Insurance changes from April 2022 announced in the Autumn Budget.)

The personal allowance is reduced for anyone that earns over £100,000. (This is known as the personal allowance restriction). It is restricted by £1 for every £2 of your income over £100,000. That means once earnings reach £125,140, all personal allowance is lost and you’ll need to complete a self-assessment tax return for £100k+ earners.

How to Claim It

If you are employed by someone who gives you a payslip, your employer will give you your personal allowance entitlement every time they pay you. For the tax year 2021/2022, the most common tax code is 1257L, previously 1250L. This means you’ll receive 1/12ths of the personal allowance each time you are paid, that’s £1047.50 per month (£12,570 ÷ 12). If your tax code is not 1257L, then adjustments are being made by HMRC for the amount of free pay you are entitled to. Read this guide about understanding tax codes to find out more.

If you are self-employed, you’ll receive your tax-free allowance when you fill in your tax return online. It will be automatically applied when HMRC calculate how much tax you owe, so you don’t need to do anything to claim it.

Read More: The UK Personal Allowance Explained

2. Personal Savings Allowance

The personal savings allowance lets UK individuals earn a certain amount of interest on their savings tax-free every tax year, depending on the rate of tax they pay.

The allowance for the 2021/2022 and 2022/2023 tax year is:

  • Basic Rate Taxpayers (20%) £1,000
  • Higher Rate Taxpayers (40%) £500
  • Additional Rate Taxpayers (45%) £0

How to Claim It

If you complete a tax return, you’ll need to declare your interest income on the form. The personal savings allowance will be automatically applied when HMRC calculates your tax bill as part of finishing up your return.

If you are employed, HMRC can adjust your tax code so you pay your tax automatically through your payslip.

If you are not employed, do not receive a pension and do not complete a tax return to claim your allowance, your bank will let HMRC know how much interest you have received. Then, HMRC will contact you to pay any tax due.

Read More: Personal Savings Allowance

3. Pension Allowance

The Pension Allowance lets UK individuals contribute up to £40,000 each tax year into a private pension scheme. You will then get tax relief on these contributions.

How to Claim It

If you are employed, your employer will give you the tax benefit of your pension contributions every time they pay you. Otherwise, you’ll need to claim your tax relief on your tax return.

Read More: Private Pensions for the Self-Employed

4. Dividend Allowance

The UK Dividend Allowance entitles everyone in the UK to earn an amount through dividends tax-free every tax year. For 2021/2022, and 2022/2023 it is £2,000. It applies to Limited Company owners who take a dividend from their own Company.

How to Claim It

If you earn less than the UK Dividend Allowance, you don’t need to tell HMRC anything. If you earn more than the allowance, you’ll need to fill in a tax return online. The allowance will be automatically applied when HMRC calculates your tax bill.

If you are employed and receive less than £10,000 in dividends, you can contact HMRC to adjust your tax code on your payslip. That means you avoid needing to register for self-assessment and filling in a tax return.

Read More: Dividend Allowance

5. Maternity Allowance

Maternity Allowance is a statutory benefit paid to mums-to-be who are not entitled to statutory maternity leave and pay. The government introduced the Maternity Allowance for those who are expecting a baby and are:

  • Self-employed;
  • Playing a part in the self-employed business of their spouse or civil partner;
  • Agency workers without employment rights.

The full rate is paid for 39 weeks at the lower of:

  • £148.68 per week or;
  • 90% of your average gross weekly earnings (before tax)

How to Claim It

You can claim your allowance at the start of the fourteenth week before the week your baby is due, even if you are still working.

You’ll need to apply using a MA1 Form. This form tells HMRC a bit about you and when your baby is due so that they can work out if you are eligible for Maternity Allowance.

Read More: Maternity Allowance

6. Marriage Allowance

The HMRC Marriage Allowance is a tax scheme that allows one partner to transfer up to 10% of their unused personal allowance to another.

This means that one person can benefit from some additional tax-free earnings. It can be particularly useful if you are new to self-employment, are still building up your income or income has taken a dip.

How to Claim It

When you are self-employed, you need to apply for marriage allowance on your tax return form. You will need to add details of your partner, including their National Insurance number.

If your partner is employed, then an adjustment will be made to their tax code by their employer.

If both you and your partner are self-employed, then the recipient will see a reduction in their self-assessment tax bill when they file their tax return.

Read More: Marriage Allowance

7. £1,000 Trading & Property Allowance

The trading and property allowance allows everyone in the UK to earn £1,000 from self-employment income or rental payments tax-free.

This is £1,000 in turnover, not profit. The allowance is really geared up for people who have odd-jobs like baby sitting, but it is useful if you are just starting out as self-employed.

How to Claim It

If you are not registered to fill in a tax return, then you don’t need to do anything to claim the £1,000 allowance. It’s there to simplify reporting so there is no need to tell HMRC. However, you must keep records for what you have been paid to prove you were entitled, should the tax-man ever ask.

If you already fill out a tax return for another reason, then you should claim the allowance in either the property or self-employment section of your return.

Read More: £1,000 Trading & Property Allowance

8. Allowable Expenses

Businesses are permitted to deduct certain allowable expenses from their taxable income before working out how much tax they have to pay.

How to Claim It

If you are self-employed, you’ll claim your allowable expenses in the self-employment section of your tax return. A Limited Company will make a similar claim using a corporation tax return or CT600.

Read More: Allowable Expenses

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9. Annual Investment Allowance

The Annual Investment Allowance permits businesses to deduct 100% of the first £200,000 you spend on plant & machinery against your taxes in the year it is purchased, rather than using write down allowances of 18% year on year.

How to Claim It

If you are self-employed, you’ll claim the Annual Investment Allowance in the self-employment section of your tax return. A Limited Company will make need to make their claim in their corporation tax return or CT600.

Read More: Annual Investment Allowance

10. Capital Allowances

Capital Allowances are a way of claiming tax relief on capital expenditure (or fixed assets). Rates are set by HMRC, depending one what has been purchased, determining the amount and number of years tax relief is claimed.

How to Claim It

If you are self-employed, you’ll claim the capital allowances in the self-employment section of your tax return. A Limited Company will make need to make their claim in their corporation tax return or CT600.

Read More: Capital Allowances

11. Mileage Allowance

A Mileage Allowance claim is made when a personal vehicle is used for business travel. HMRC permits you to claim a set amount per journey as an allowable business expense against your taxes.

This set amount takes the form of a payment per mile and covers the cost of fuel as well as wear and tear on your vehicle, MOT and servicing.

  • Cars 45p for the first 10,000 of business mileage, 25p thereafter
  • Motorcycles 24p per mile
  • Bicycles 20p per mile

How to Claim It

Mileage Allowance can be claimed like any other allowable business expense, but you must keep a log of where you travelled, why and how many miles you covered.

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12. Simplified Expenses

Simplified expenses is a scheme set up by HMRC to help self-employed people and sole traders claim for certain expenses using a flat rate (rather than the actual amounts), without needing receipts.

Only 3 types of business expenses are included in the scheme:

  1. Business mileage when you use your personal vehicle;
  2. Home office if you work from home;
  3. Living in your business premises.

How to Claim It

You’ll need to include the value of any simplified expenses you wish to claim along with your other business expenses in the self employment section of your tax return.

There is no need to show your claim separately, but you should keep a note of what you are claiming for and how you worked it out as part of your records. This is in case HMRC ever ask for evidence of what you are claiming for.

Read More: Simplified Expenses

13. Trading Losses

Trading losses occur when a business or someone who is self-employed finds themselves in a situation where allowable expenses exceed taxable income.

There are 4 main ways trading losses can be used:

  1. Carry Back Your Tax Loss and set it against previous profits to claim a tax refund;
  2. Use sideways relief to claim a tax refund if you are employed and self-employed;
  3. Use the trading loss against capital gains made in the same tax year;
  4. Carry forward the tax loss and use it to reduce profits in future tax years.

How to Claim It

You’ll need to log your loss in the self-employment section of your tax return, then you can decide which is the most tax-efficient way to use your trading loss.

Read More: Trading Losses

14. Overlap Relief

Overlap relief is a type of tax relief for any double tax paid on overlap profits.

Any overlap profits affect self-employed (sole trader) individuals who choose to report income and expenses on their tax return for a different period to the tax year.

HMRC allows self-employed business owners to claim back this overpaid tax, using the rules of Overlap Relief when:

  1. Changing accounting periods;
  2. Ceasing trade either by stopping the business or incorporating it.

How to Claim It

Overlap relief must be claimed on a self-assessment tax return, by setting overlap profits against the current taxable profits. The figure being claimed needs to be entered into Box 69 of the self-employment section.

Read More: Overlap Relief

15. Terminal Loss Relief

When a Limited Company stops trading it can apply the HMRC rules of terminal loss relief. These rules permit a slightly different use of a final accounting period tax losses to normal.

There are two options for using final corporation tax losses:

  1. Carry back the final period tax loss and set it against prior profits;
  2. Carry forward any previous unused tax losses from trading years without the restrictions on losses made pre April 2017 being applied.

How to Claim It

You must claim for terminal loss relief within 2 years from the end of the accounting period that you stopped trading. You can make your claim in:

  • your corporation tax return;
  • an amendment to the corporation tax returns;
  • a letter to HMRC.

Read More: Terminal Loss Relief

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About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek and money nerd helping financial DIY-ers organise their money so they can hit their goals quicker.