Tax Relief: How to Claim & Reduce Your Tax Bill

tax relief

IN THIS ARTICLE

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.

While 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.

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 that are exclusively for work purposes, such as allowable business expenses, or you can claim tax back from HMRC or have it repaid in another way, like into a personal pension.

Tax reliefs are used in addition to the personal tax allowance.

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. There are also different rules relating to those in paid employment and those working on a self-employed basis. In either scenario, you must meet the relevant requirements under the rules to be eligible for relief.

 

Tax Relief for Employed Workers’ Job Expenses

 

As an employee, you might be able to claim tax relief for things you have bought for the purposes of your job, but only where you use these things meet the ‘wholly, exclusively and necessarily’ test for expenses:

 

Wholly The expense must be incurred solely for your job, not for personal reasons.
Exclusively The expense must not be used for anything else but your job.
Necessarily The expense must be essential for doing your job and not optional.

 
 

You cannot claim tax relief if your employer pays for, or reimburses, your expenses.

Where Income tax relief is available, it 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, or by filing a self assessment return.

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).

 

Tax Relief for Self-Employed Workers

 

If you are self-employed, you will typically be able to deduct certain business expenses from your trading profits before calculating income tax, so as to reduce your taxable income.

There are a wide range of allowable expenses you can claim, which must meet the wholly and exclusively test. ‘Wholly’ means he expense must be incurred solely for your business, not for personal reasons. ‘Exclusively’ means the expense must not be used for anything else but your business.

These 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 Income Tax bracket you fall into.

Alternatively, you may be able to you can claim tax back from HMRC. To do this, you’ll need to complete a self-assessment tax return so that HMRC can determine your level of tax relief.

 

Tax Relief on Work Expenses

 

Income tax relief may be available on allowable expenses incurred in the running of your business or incurred in the course of your job. Allowable business expenses can include costs such as office equipment, staff expenses, legal and financial costs, any marketing or training costs, subscriptions and the reasonable costs of business-related entertainment.

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.

 

Travel expenses

 

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.

 

Home-Working Expenses

 

Employees may be eligible to claim tax relief if their employer requires them to work from home and it is not by choice, and doesn’t reimburse them for the expenses. This means you cannot claim home working expense if your employment contract allows you to do so.

Claimable expenses are generally limited to additional household costs (electricity, internet) and specific work-related items like dedicated furniture or phone calls.

Under the Simplified Flat Rate Scheme, employees 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.

As an alternative, under the Detailed Expense Method allows the employee to claim for a portion of household bills and specific work-related expenses by calculating the work-related usage.

Self-employed workers can claim relief for a wider range of situations, as long as the home office is used for business purposes and provided you have not used the £1,000 tax-free trading allowance in lieu of all expenses.

Self-employed workers can claim for the full proportion of household bills used for the business if the space is dedicated for work exclusively. Examples of allowable home working expenses include rent or mortgage interest for the business portion of the workspace, council tax and water bills for the business portion, heating costs for the business portion and business phone line and broadband costs. Record keeping will be essential to support your claims.

Under HMRC’s simplified expenses rules, self-employed worker can claim 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.

The simplified system does not include telephone or internet business expenses, which should be claimed  based on the actual costs to the business.

 

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.

 

How to Claim Tax Relief as an Employee

 

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.

 

How to Claim Tax Relief as Self Employed

 

Most self employed workers claim tax relief through their self-assessment tax return when their profit is over £1000 per year. When filing your return, you’ll list your income and deduct all allowable business expenses to arrive at your taxable profit.

Detailed record-keeping of your income and expenses throughout the year is essential. This includes receipts, invoices, bank statements, and mileage logs. These records will be required to support your claims in case of a tax audit.

As an alternative to claiming actual expenses, you can opt for a flat-rate trading allowance of £1,000. This simplifies things but may not be as beneficial if your actual expenses exceed £1,000.

 

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 an employed and self-employed basis.

 

Legal disclaimer

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.

 

Author

Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.

Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.

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