Income Tax Allowances and Reliefs

Income tax allowances and reliefs reduce the amount of tax you have to pay. The ones you can claim depend on your personal circumstances, employment status and business spending.

In this guide, I’ll show you the main UK allowances and reliefs you need to be aware of, as well as showing you how you can claim them.

Personal Allowance

What is It?

The UK personal allowance entitles everyone in the UK to earn an amount tax-free every tax year – for 2020/2021 it is £12,500.

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 £123,000 in they will lose all their Personal Allowance.

How to Claim It

If you are employed in a job, your employer will give you your personal allowance entitlement every time they pay you. So if you are paid monthly you’ll receive 1/12ths of the personal allowance each time you are paid, that’s £1041.67 per month for 2020/2021 (£12,500 ÷ 12).

If you are self-employed, you’ll receive your tax-free allowance when you fill out your self-assessment 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.

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The Personal Allowance

Personal Savings Allowance

What is It?

The personal savings allowances 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 current allowance 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 your pay your tax automatically.

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

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Personal Savings Allowance

Pension Allowance

What is It?

The pension allowance lets UK individuals contribute up to £40,000 each tax year into a private pension scheme and 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 self-assessment tax return form.

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Private Pensions for the Self-Employed

Dividend Allowance

What is It?

The UK dividend allowance entitles everyone in the UK to earn an amount through dividends tax-free every tax year – for 2020/2021 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 out a self-assessment 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. That means you avoid needing to fill out a tax return.

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Dividend Allowance

Maternity Allowance

What is It?

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.

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Maternity Allowance

Marriage Allowance

What is It?

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 newly self-employed, 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 self-assessment 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.

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Marriage Allowance

£1,000 Trading & Property Allowance

What is It?

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, but 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.

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£1,000 Trading & Property Allowance

Allowable Expenses

What is It?

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.

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Allowable Expenses

Annual Investment Allowance

What is It?

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.

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Annual Investment Allowance

Capital Allowances

What is It?

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.

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Capital Allowances

Mileage Allowance

What is It?

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 expenses, but you must keep a log of where you travelled, why and how many miles you covered.

If you are using my bookkeeping spreadsheet, you’ll see I’ve included a mileage claim form for you to fill out that is automatically included as part of your monthly expenses.

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Mileage Allowance

Bicycle Allowance

Simplified Expenses

What is It?

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 that 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 you 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, in case HMRC ever ask for evidence of what you are claiming for.

If you are using my bookkeeping spreadsheet, I’ve included reminders and automated calculations for business milage and your home office so you can easily record your claim ready for your tax return.

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Simplified Expenses

Trading Losses

What is It?

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.

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Trading Losses

Overlap Relief

What is It?

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

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.

claiming overlap relief
Income Tax Allowances and Reliefs: Claiming Overlap Relief

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Overlap Relief

Terminal Loss Relief

What is It?

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.

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Terminal Loss Relief

New Here? These are my most popular resources:

  • The Ultimate Bookkeeping Spreadsheet – Organise your money, track the numbers that matter and stay on top of your cash;
  • Freebies – templates, spreadsheets, calculators and cheat sheets. Here you’ll find all my freebies for the self-employed community, all in one place.
  • Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
  • FREE Business Expenses Cheatsheet – Check what you can and can’t claim as an expense against your taxes.
  • 6 Core Elements of Self-Employment Taxes – Confused by taxes? Worried you’re missing something when it comes to tax allowances and reliefs? These easy to follow 6 mini-guides will have you on top of the tax side of things in no time at all.
Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - a UK small business finance blog where she shares help and advice with the self-employed community to make topics like registering a business, bookkeeping and taxes easy to understand.