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Tax allowance and reliefs in the UK

tax allowances and reliefs in the UK
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    Personal Allowance 2021/22

    The personal allowance is the income threshold above which tax is charged on an individual’s income. A person who receives payment less than the personal allowance, which is £12,570 for the 2021/22 year, does not have to pay tax in the UK.

    However, it is essential to note that personal allowance goes down by £1 for every £2 when the individual income is above the £100,000 limit. If an individual earns an income of £125,140 for the 2021/22 tax year, they will not have a personal allowance.

    Dividend Allowance

    You do not have to reimburse tax on dividend income if that falls under your allowance threshold. In addition to that, you are also entitled to a dividend allowance each year, which is currently at £2,000. You will only reimburse tax on dividend income above the tax-free dividend allowance.

    Personal Savings Allowance

    Your allowance will allow you to earn interest income on your savings. This allowance may vary on what rate that you pay income tax.

    If you are a primary taxpayer (20%), you can earn £1,000 of savings interest with no tax.

    If you reimburse taxes at a higher rate (40%), your personal savings allowance will be reduced to £500.

    However, if you pay tax at an additional rate (45%), you are not entitled to any personal savings allowance.

    Pension Allowance

    The pension allowance is the maximum you can contribute/save in your Pension account in a tax year before you are liable to pay taxes.

    You will only have to pay taxes if you exceed the annual allowance of £40,000.

    This annual allowance applies to all of your private pension schemes. Annual allowance includes:

    1. Defined Contribution Scheme (Paid by you or anyone else (employer’s contribution)
    2. An Increase of Defined Benefit Scheme within a year

    Capital Gain Allowance

    The capital gains tax is the levy charged on the profits incurred when the investment is disposed of.

    In the UK, tax-free capital gain allowance is £12,300 for 2021/22 tax year. You only pay tax at 20% of your taxable gains are above the tax-free allowance of £12,300.

    Special rates and Allowances

    • You pay tax at 28% if you make a gain by selling your residential property.
    • If you qualify for Business Asset disposal relief (Entrepreneurs’ Relief), you pay tax at 10% on your chargeable gains.

    Annual Investment Allowance for Businesses

    You are entitled to an Annual Investment allowance when you purchase business assets such as Equipment, Machinery, and Business vehicles. These are called Plant & Machinery.

    You will be able to claim some or all of the Value as an allowable expense while calculating your taxable profits.

    You can subtract the total cost of the item purchased from your profits before tax if that item qualifies for an annual investment Allowance. However, if you vend the item after claiming the annual investment allowance, you may pay the tax.

    The annual Investment allowance is currently stated at £1 million per annum. You will have to adjust your Annual Investment allowance if your trading period is less than 12 months. For example, if your trading period is six months, your annual investment allowance would be 6/12*1,000,000 = 500,000.

    Super Deduction for Businesses

    For qualifying capital expenditure incurred from 1st April 2021 to 31st March 2023, companies are entitled to claim 130% of capital allowances.

    Example 1

    • Assume your business has invested £10,000 on leading rate equipment, and you are eligible for Super-Deduction.
    • You can deduct £13,000 from your taxable profits. This will save 19% corporation tax which is £2,470.

    Tax Reliefs for Investors using Venture capital Scheme

    Enterprise Investment Scheme (EIS)

    If you have invested in qualifying company EIS, you can claim 30% income tax relief on invested amount against your tax bill. Further, you can “carry back” all or part of the investment to the preceding tax year. However, it is essential to note that EIS investment must be held for three years to retain the tax relief gained.

    The maximum tax relief you can receive via EIS is £300,000 (£1,000,000 investment per year) if you have sufficient tax liability to cover it.

    Seed Enterprise Investment Scheme (SEIS)

    The Seed Enterprise Investment Scheme helps individuals with income tax relief at 50% on the value of their investment. You can only invest £100,000 per year in Seed Enterprise Investment Scheme qualifying companies.

    Example 1

    • The company doubles in Value.
    • Your investment = £10,000
    • Income tax relief = £5,000 (50% of the investment)
    • Sale proceeds of Shares = £20,000
    • Gain on Sale = £10,000
    • No Capital gain tax will be charged. (If held shares for three years)
    • Total Tax-free return = £15,000

    Example 2

    • No changes into company value after three years
    • Your investment = £10,000
    • Sale proceeds of Shares = £10,000
    • No gains on sales.
    • Total gain = Income tax relief = £5,000 (50% of the investment)

    Example 3

    • Company shares hold no value
    • Your investment = £10,000
    • Income tax relief = £5,000 (50% of the investment)
    • Risk Capital = £5,000
    • Loss relief = £2,250 (45% of the risk capital)
    • Total Loss = £2,750 (£10,000 – (£5,000 + £2,250)

    Tax relief for Employees

    You are entitled to claim tax reliefs on allowable expenses as an employee. If you have spent on work-related expenses that your employer did not cover, you are eligible to claim tax relief.

    • If you use your motor vehicle for work, you are getting paid less than the approved mileage rates. You are entitled to claim the difference.
    • You can claim the cost of restoring or maintaining your tools and personal protective equipment.
    • You can claim the cost of equipment purchases needed for your work purposes. Such as Laptops, Phones or any other related device or equipment. (You are not permitted to claim for Bicycles or vehicles)
    • You are entitled to claim the cost of fees or subscriptions paid for by approved professional bodies relating to your work. (Eg: Accountants can claim the price for CIMA/ACCA subscriptions)

    If you were requested to work from home, you could claim £6 a week. You cannot claim this as an allowable expense if you choose to work from home.

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