Understanding how tax relief works in the UK can help you to minimise the amount of tax payable on any income received as either an employed worker, or when working for yourself on a self-employed basis, helping you to maximise your take-home pay or net profit.
The following guide for UK taxpayers looks at how to reduce your income tax bill through different types of tax reliefs potentially available to you, including what you can claim tax relief on, how far back you can claim and the procedural options for claiming.
What is tax relief?
In broad terms, tax relief can be defined as any rule or provision that lowers the amount of tax that you are liable to pay. Tax relief essentially means that you either:
- pay less tax to take account of money that you have spent on specific things, such as work-related or business expenses, or
- get tax back or get it repaid in another way, like into a personal pension.
How does tax relief work?
The way in which tax relief works can vary, depending on the nature of the relief sought, as well as whether you are claiming relief on employment or trading income. For example, if you are seeking income tax relief on job expenses as an employee, you might be able to claim relief if you use money for things you buy for the purposes of your job, but where you only use these things for work. Equally, if you are self-employed, where your business will have various running costs, you will typically be able to deduct some or all of your costs, provided these are allowable expenses, before you are taxed on your trading profits.
However, even though there are broadly similar principles in place when considering expenses for the employed and self-employed, there are different rules relating to what can and cannot be claimed. Additionally, the way in which tax relief can be claimed differs.
As an employee, income tax relief would usually be claimed by a way of an adjustment to your PAYE tax code, in this way reducing the amount of tax payable during the tax year. Provided you have paid tax in the year you are claiming for, you will get tax relief based on what you have spent and the rate at which you pay tax. For example, if you spend £100 and pay tax at a rate of 20% in that year, the tax relief you can claim is £20 (20% of £100).
In contrast, as a sole trader or business owner, running costs claimed by way of allowable business expenses would need to be deducted from your gross turnover to work out your taxable profit. For example, if your turnover is £50,000, and you claim £10,000 in allowable business expenses, you will only pay tax on the remaining £40,000. The amount of your taxable profit for the year will then determine the tax bracket you fall into. For taxable income of less than £50,270, you will pay tax at the basic rate of 20%.
Can you claim tax relief?
Whether or not you are eligible for tax relief will depend on the nature of the tax relief sought and the circumstances surrounding this. There are specific rules relating to those in paid employment, with different rules for those working on a self-employed basis. In either scenario, you must meet the relevant requirements under the rules to be eligible for relief.
For example, when claiming tax relief for working from home, the allowance for employees is restricted to limited scenarios (as from 6 April 2022, following a temporary relaxation of the rules during the coronavirus pandemic). As such, this form of tax relief is only available where the nature of an employee’s duties require them to live at a distance from their employer’s premises, or when the employer does not have premises, or where there are no appropriate facilities on the employer’s premises for the employee to perform the substantive duties of their employment. The current tax relief rules specifically exclude where someone simply chooses to work from home or where remote working is a provision within their employment contract.
Employees will also be limited to claiming tax relief for additional household costs only, such as increased energy bills, but not costs that would stay the same whether they were working at home or in an office, such as rental payments or council tax.
In contrast, the self-employed can opt to work partly or wholly from home, generally without restriction. They can also claim a proportion of all their utility bills by way of allowable business expenses, as well as council tax, rent or mortgage interest, provided they can identify a reasonable method of apportioning these costs between private and business use. This could be, for example, based on the number of rooms in the house used for business, together with the amount of time spent working from home.
Types of tax relief in the UK
There are a number of different types of income tax relief available to both employees and the self-employed, including home-working expenses, where applicable, as well as various other work-related expenses, such as travel expenses etc. Tax relief can also be sought on pension contributions, and even maintenance payments or charitable donations, although below we look at two of the most commonly claimed forms of tax relief, travel expenses and home-working expenses, to demonstrate how these operate in practice.
When it comes to work-related expenses for employees, travel expenses represent one of the most common forms of tax relief. As an employee, you may be able to claim for travel between workplaces or travelling to appointments, although this does not usually include travelling to and from your work. For qualifying journeys, you can claim relief for any vehicle you use for work, including a car, van, motorcycle or bicycle. However, how much you can claim will depend on whether you are using a vehicle bought or leased with your own money, or a vehicle owned or leased by your employer, ie; a company vehicle.
If you are using your own vehicle for work, you will usually be able to claim tax relief on an approved mileage rate. This covers the cost of owning and running your vehicle, although you cannot claim separately for things like fuel, electricity, vehicle tax, MOTs or repairs.
To work out how much you can claim for each tax year, you will need to keep records of the dates and mileage of your work journeys, where there are approved mileage rates based on the type of vehicle and number of miles travelled. For example, for the first 10,000 business miles in the tax year for cars and vans, the rate is 45 pence per mile, reduced to 25 pence for business miles over the 10,000 mile threshold. If you use a company vehicle for work, you can claim tax relief on the money you have spent on fuel and electricity for any work-related trips. You will again need to keep records to show the actual cost of the fuel and, if your employer reimburses some of the money, you can only claim relief on the difference.
Similarly, for those working on a self-employed basis, you can claim the cost of business-related travel, although you would not be covered for non-business driving or travel costs, or for travel between home and work. Allowable business expenses in the context of travel could include the cost of fuel and parking, as well as train, bus, air and taxi fares. You can also claim hire charges, vehicle insurance, vehicle licence fees, repairs, servicing and breakdown cover, although you would not be covered for things like penalties or fines.
When it comes to calculating allowable vehicle expenses, you can either claim relief on the actual costs of buying and running your vehicle, or by using a flat rate for mileage instead, known as simplified expenses. However, you cannot claim simplified expenses for a vehicle that you have already claimed capital allowances for or where you have claimed the £1,000 tax-free trading allowance in lieu of all expenses combined. As with employee travel expenses, the flat rate per mile with simplified expenses for cars or goods vehicles for the first 10,000 miles is 45 pence per mile, reduced to 25 pence for travel over 10,000 miles.
When it comes to home-working expenses for employees, even though the scope of this relief has narrowed significantly since the pandemic, you may still be entitled to a rebate for time spent working from home during lockdown or when required to self-isolate.
For the tax years 2022/23 and 2023/24, you can only claim working from home tax relief if your job requires you to live far away from your place of work or your employer does not have an office. However, for 2020/21 and 2021/22, this tax relief was readily available for any additional household costs where you were required to work from home, and for which you can make a retrospective claim. Provided you have not already been reimbursed by your employer for the extra costs, HMRC will accept backdated claims for up to 4 tax years.
For the self-employed, you can continue to claim expenses for working from home, where there are no restrictions on doing so in the context of the relevant tax relief rules, provided you have not used the £1,000 tax-free trading allowance in lieu of all expenses.
When it comes to how much you can claim for home-working expenses, the basis upon which the cost of working from home is calculated will depend on whether you are claiming tax relief as an employee or someone self-employed. However, in either case, rather than calculating the actual costs related to your job or business, you can adopt a simplified approach to avoid complex calculations and the need to provide proof.
For employees, you can apply a flat rate of £6 per week, where you will get relief on this amount based on the rate at which you pay tax. If you pay the 20% basic rate of tax, you would be entitled to receive £1.20 per week in tax relief (20% of £6), so £62.40 per year.
For the self-employed, there is a flat monthly rate based on the hours of business use from home. These rates are set at £10 per month for 25-50 hours spent working from home, £18 for 51-100 hours, and £26 per month for 101 hours or more. For example, if you worked between 40-50 hours each month from home for 6 months of the tax year and 80-100 hours each month for the remaining 6 months, this would equate to 6 x £10 (£60) + 6 x £18 (£108). The total you could claim for the tax year would therefore be £168. However, as someone working on a self-employed basis, you must work for 25+ hours a month from home to use simplified expenses although, where eligible to do so, you can also claim the actual costs of business-related telecoms expenses (including telephone and internet).
How to claim tax relief
The way in which you can claim tax relief will again depend on the nature of the relief sought, as well as whether you are employed or self-employed.
For employees, HMRC has a free online service where you can claim back overpaid tax, which might be the case if you have missed out on tax reliefs you were eligible for, such as home-working and travel expenses, or other work-related expenses. This could include things like uniforms and work clothing, tools and equipment, travel and overnight expenses, as well as professional fees and subscriptions. Alternatively, you can claim by post, using Form P87, although if you receive income from another source and complete a self-assessment tax return with HMRC, you must claim through your tax return instead.
You can claim tax relief for expenses made up to 4 years previously, although you must have records of what you have spent. If your claim is for the current year, HMRC will usually adjust your tax code so you pay less tax. If your claim for tax relief is for previous years, HMRC will either make a tax code adjustment or give you a tax refund.
If you are self-employed, your claim for allowable expenses must be made via your self-assessment tax return. Your travel and any home-working expenses should be included along with any other expenses incurred in running your business, to be deducted from your annual turnover to reduce your taxable profit. Other allowable business expenses can include things like office equipment, staff expenses, legal and financial costs, any marketing or training costs, subscriptions and the reasonable costs of business-related entertainment.
Tax relief FAQs
What is the meaning of tax relief?
Tax relief can be defined as an allowable deduction that lowers the amount of tax you are liable to pay on either employment income (as an employee) or trading income (as someone working on a self-employed basis), like travel expenses.
What is an example of a tax relief?
A common example of income tax relief is travel-related expenses, where these may be deductible from employment income for travel between workplaces or where a travelling appointment is held, or from trading income for any work-related travel.
Does tax relief mean you get money back?
If you claim tax relief on employment income for the current tax year, HMRC will usually adjust your tax code so you pay less tax, and either adjust your code or give you a tax refund for previous years.
Who is eligible for tax relief?
Whether or not you are eligible for tax relief will depend on the nature of the tax relief sought, where there are specific rules relating to those in paid employment, with different rules for those working on a self-employed basis.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.