There are various tax deductions and credits available to individuals that can help reduce their overall tax liability.
Deductions and Credits, along with the applicable laws:
Every individual in the UK is entitled to a tax-free Personal Allowance, which is the amount of income you can earn before you start paying income tax. For the tax year 2021/2022, the Personal Allowance is £12,570. This amount is subject to change each tax year.
The Marriage Allowance allows couples to transfer a portion of their unused Personal Allowance to their spouse or civil partner, reducing their tax liability. If one partner earns less than the Personal Allowance, they can transfer up to £1,260 (for the tax year 2021/2022) of their unused allowance to their partner.
Contributions made to registered pension schemes are eligible for tax relief. Individuals can receive tax relief on their contributions at the highest rate of income tax they pay. The annual allowance for tax-relieved pension contributions is currently £40,000, although there are complex rules for high earners that may limit the amount of tax relief available.
Donations made to registered charities under the Gift Aid scheme can attract tax relief. Charities can claim back the basic rate of income tax on the donation, effectively increasing the value of the gift. Higher-rate and additional-rate taxpayers can also claim additional tax relief on their donations through their self-assessment tax returns.
Some work-related expenses incurred by employees can be claimed as tax deductions. These expenses must be directly related to the individual’s job and not reimbursed by their employer. Examples include travel expenses, professional subscriptions, and costs for work equipment or uniforms.
Rental Property Expenses:
If you own and rent out a property, certain expenses related to the property can be claimed as deductions against rental income. These expenses may include mortgage interest, property management fees, repairs, and maintenance costs.
Tax-Free Savings Accounts:
Individual Savings Accounts (ISAs) allow individuals to save or invest a certain amount each year without paying tax on the interest, dividends, or capital gains earned. The annual contribution limit for ISAs is £20,000 (for the tax year 2021/2022).
Child Tax Credit and Child Benefit:
Child Tax Credit and Child Benefit are financial supports available to individuals with children. Child Tax Credit provides financial assistance based on the number of children and the household income. Child Benefit is a tax-free payment provided to individuals responsible for one or more children.
Blind Person’s Allowance:
Individuals who are registered as blind or severely sight impaired are entitled to claim the Blind Person’s Allowance. This additional allowance is available on top of the standard Personal Allowance and can help reduce the overall tax liability.
Capital Gains Tax Allowance:
When individuals sell or dispose of assets that have increased in value, such as stocks, property, or valuable possessions, they may be liable for Capital Gains Tax (CGT). However, everyone is entitled to an annual CGT allowance, which is £12,300 for the tax year 2021/2022. Gains below this threshold are not subject to CGT.
Student Loan Interest Deduction:
If you have a student loan, you may be eligible to deduct the interest paid on the loan from your taxable income. The amount of deductible interest depends on your income and the type of student loan you have. It’s important to check the specific rules and thresholds for student loan interest deductions.
Childcare Vouchers and Tax-Free Childcare:
Parents can save on childcare costs through employer-provided childcare vouchers or the Tax-Free Childcare scheme. Both options offer tax relief on eligible childcare expenses, helping to reduce the overall cost of childcare.
If you rent out a room in your main residence, you may be eligible for Rent-a-Room Relief. Under this scheme, you can earn up to £7,500 per year tax-free from renting out furnished accommodation in your home.
Research and Development (R&D) Tax Credits:
If you are engaged in qualifying research and development activities, you may be eligible for R&D tax credits. These credits provide tax relief on eligible R&D expenditure, helping to encourage innovation and technological advancements.
Employment Expenses for Self-Employed Individuals:
Self-employed individuals can claim a range of allowable expenses against their income to reduce their taxable profits. These expenses can include office rent, utilities, professional fees, business travel, and other expenses directly related to the business.
Entrepreneurs’ Relief allows individuals selling all or part of their business to pay a reduced rate of Capital Gains Tax (10%) on qualifying gains, up to a lifetime limit. The relief is aimed at encouraging entrepreneurship and business growth.
Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS):
These schemes provide tax incentives for individuals investing in qualifying early-stage companies. Investors can claim income tax relief and potential capital gains tax exemptions or deferrals, subject to certain conditions.
Rent Relief for Furnished Holiday Lettings:
Owners of furnished holiday lettings in the UK or the European Economic Area (EEA) may be eligible for certain tax reliefs, including potential capital gains tax reliefs and allowances.
Social Investment Tax Relief (SITR):
SITR provides tax relief to individuals investing in qualifying social enterprises. Investors can claim income tax relief and potential capital gains tax exemptions for eligible investments.
Non-Resident Tax Relief:
Individuals who are non-residents in the UK but have UK source income may be eligible for specific tax reliefs and exemptions under double tax treaties or unilateral relief provisions.