Tax can feel like a one-way road, with money leaving your pocket and going straight to HM Revenue and Customs (HMRC). However, the UK government allows you to keep more of your money through tax relief. Whether it’s through specific claims you make yourself or automatic allowances, understanding how tax relief works is one of the most effective ways to boost your take-home pay. This guide explains what is tax relief, how it works, how you can claim it, and the eligibility criteria. After reading this guide, you will better understand how to reduce your tax liability.
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What is Tax Relief?
Tax relief reduces your tax bill by allowing you to deduct certain costs, such as pension contributions, from your taxable income.
Alternatively, you can reclaim tax relief from HMRC after paying tax, as with charitable donations via Gift Aid. Tax relief can be claimed along with the Personal Allowance. This results in higher take-home pay.
What is the Purpose of Tax Relief in the UK?
In the UK, the main purpose of tax relief is to make the tax system fairer by ensuring you are not taxed on certain essential costs. The tax system also ensures you are not taxed on specific work-related costs.
Tax relief acts as a government incentive to encourage behaviours that benefit the economy or society. For example, the UK government schemes like the merged R&D expenditure credit (RDEC) scheme and enhanced R&D intensive support (ERIS) support the UK’s business innovation.
Some of the key purposes of tax relief are:
- By offering relief on pensions, the UK government incentivises you to save for retirement so you are less dependent on the state in the future.
- Tax relief compensates employees for job-related expenses to ensure they are not paying to work.
- The government boosts donations to charities through Gift Aid. This allows your tax money to go toward a good cause instead of the Treasury.
- Schemes like Married Couple’s Allowance allow low-earning households to transfer their tax-free threshold to a higher-earning partner. A spouse can transfer £1,260 of their personal allowance to their civil partner, reducing their tax up to £252 in a tax year.
Now that you know what tax relief is, let’s discuss how it works.
Does Tax Relief Really Work?
Yes, tax relief really works. However, you must be eligible and be proactive about claiming it. You can legally reduce your tax bill or get a refund from HMRC.
How Tax Relief Works?
To understand what is tax relief, you need to learn how it works. You can receive tax relief on certain payments, such as pension contributions or allowable work expenses. For employees, income tax is deducted through Pay As You Earn (PAYE).
Whereas, self-employed individuals or those earning from other sources must register for Self-Assessment with HMRC to get their eligible tax relief. It is crucial to complete a return as it helps HMRC to calculate how much tax relief you are eligible for.
Automatic Savings
Some tax relief is applied before you even see your pay, like pension contributions, so you pay less tax instantly.
Cash Rebates
Other reliefs, like professional fees, must be claimed to receive a refund or a tax code adjustment that increases monthly take-home pay.
What Does it Mean to Get Tax Relief?
In the UK, getting tax relief means the government allows you to keep more of your money by reducing the amount of Income Tax you have to pay. It is not a discount on a bill you have received, but it is an adjustment to how much of your income is considered taxable. It works in one of two ways:
You Get a Tax Refund
If a person has already paid tax on money that should have been relief-eligible, HMRC will pay that money back to you. This can happen if:
- You claim for work expenses
- You are a higher-rate taxpayer
- You have made charitable donations through Gift Aid
You Pay Less Tax Upfront
HMRC may adjust your tax code to increase your tax-free allowance, which is why you might see a code like 1263L. Your employer takes less tax out of your monthly paycheck because your tax-free threshold is higher. This leaves you with more take-home pay.
To learn in detail about what is tax relief and how it works, visit the official website of HMRC.
What Are the Types of Tax Relief in the UK
There are some potential tax reliefs you can claim. Some will be suitable for you while others may be relevant in the future. Let’s discuss some common tax reliefs you can claim:
Family and Personal Reliefs
Family and personal tax reliefs include:
Marriage Allowance
You can transfer £1,260 of your personal allowance to your partner if you earn less than £12,570. This can save them up to £252 annually in tax.
Married Couple’s Allowance
You can claim Married Couple’s Allowance if:
- You are married or live in a civil partnership
- You live with your partner
- You or your partner was born before 6 April 1935
If you meet the above points, you can reduce your tax bill between £436 and £1,127 a year.
Blind Person’s Allowance
This is an extra tax-free amount added to your personal Allowance if you are registered as blind.
Work Related Reliefs
Travel Costs
You cannot claim tax relief for commuting from home to your usual workplace. However, claims can be made for travel that are for business purposes, subject to the HMRC mileage allowance rates.
If you use public transport for commuting, employers may provide a season ticket salary sacrifice scheme, allowing you to pay in monthly instalments from your pre-tax salary.
Working From Home
Employees working from home can only claim tax relief for household expenses if they are required to work from home by their employer.
Job Expenses
You can claim expenses that are wholly and exclusively incurred for work, such as a professional subscription, cleaning, or repairing a branded uniform.
Charitable Donations Tax Relief
Gift Aid
When donating money, HMRC assumes the donation has already been taxed. For basic rate taxpayers (20%), donations are made from already taxed income. Gift Aid enables charities to reclaim that 20%, enhancing the donation’s value. Higher-rate taxpayers can also obtain tax relief by reporting Gift Aid payments during their self-assessment with HMRC.
Pension Contributions
Pension Tax Relief
Tax relief on pension contributions can be claimed on amounts up to 100% of your annual earnings. However, you can receive a maximum annual allowance of £60,000.
Those earning above a certain threshold may experience a reduced (tapered) allowance.
Moreover, tax relief is automatically applied to your contributions if you belong to an employer’s pension scheme. However, personal or stakeholder pension contributions require a different claims process.
How to Claim Tax Relief?
Knowing what is tax relief is not enough to comply with the UK tax regulations. You should know how to claim tax reliefs and how you can legally reduce your tax bills.
Claiming tax relief is usually straightforward and may require a Personal Tax Account with a Government Gateway ID. If relief should have been applied in previous years, a tax rebate may be applicable.
To claim tax relief, you can complete a tax return or request a tax code adjustment through HMRC. HMRC may also issue a P800 if they identify overpaid taxes.
How to Claim Work Expenses HMRC?
In the UK, to claim tax relief for work expenses from HMRC, you either claim online, by post, or through your tax return. Generally, if your expenses are £2,500 or less for the tax year, you can use form P87.
However, if your expenses are more than this amount, you must file a Self-Assessment tax return.
Why Understanding What is Tax Relief Matters?
Understanding what is tax relief can help businesses and individuals to make smart financial decisions. It allows them to:
- Keep more of their earnings
- Take advantage of available UK tax benefits
- Reduce your tax bill
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Conclusion
So what is tax relief? Tax relief is a legal way to reduce your tax bill. It is not a loophole but a legitimate part of the UK tax system that is designed to support workers and donors.
By staying informed about what you are entitled to, you can pay the correct amount of tax to HMRC. This also helps you avoid underpaying or overpaying tax to HMRC. Check your tax code regularly and keep receipts for job expenses to claim tax on eligible expenses.
Disclaimer: This article intends to provide general information on what is tax relief in the UK.