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Navigating the UK tax system can be complex, especially for individuals with multiple income sources, self-employment income, or investments. Many taxpayers either underpay or overpay tax due to incorrect tax codes or missed reliefs. This article provides a practical overview of key areas where tax relief may be available - from checking your PAYE tax code to claiming allowable expenses on property or self-employment income, pension contributions, and venture capital investments. Understanding and applying these opportunities correctly can significantly reduce your tax liability and ensure you're not paying more than necessary.

Correct Tax Codes

Where an individual pays tax directly through PAYE deductions, it is often the case that they have either paid too little or too much tax through the tax code applied. It is important to confirm that the correct sources of income have been factored into calculating the tax-free amount as well as confirming the correct allowances have been included.

In certain circumstances, temporary emergency tax codes such as W1 or M1 can come into effect where HMRC doesn’t have all details of an individual’s income. This could happen if the individual has more than one job, has recently changed jobs, is employed after being self-employed, or is receiving company benefits.

Have you claimed all allowable expenditure?

Where an individual receives property or self-employment income, certain allowable expenditure may be deducted to reduce the taxable income:

Property income:

• Certain expenses occurred in the running and maintenance of a running property may be available to be deducted from the gross rental income. This may include property repairs, letting/management fees, accountancy fees, insurance, service charges and council tax.
• Interest paid on mortgage payments is not fully recoverable for higher or additional rate taxpayers but a 20% tax reducer can still provide valuable tax relief.
• In some cases, your rental expenditure for a tax year may be less than £1,000. In this case, the property allowance of £1,000 may be deducted from your rental income.

Self-employment Income:

• Allowable business expenses reduce the amount of profit on which sole traders pay tax. Optimising your allowable expenses leads to less taxable profit and less Income Tax to pay.
• Individual’s trading as sole traders will be able to deduct certain expenses that have been incurred “wholly and exclusively” for the purposes of running the business. These may include but are not limited to office equipment, professional financial services, stationery and communications, car/vehicle costs and internet costs. If any of these are used privately, they will need to be apportioned proportionately.
• In certain circumstances, the self employed can choose to use simplified or flat rate expenses for some costs (home working, living at your business premises and driving a business vehicle).
• It’s easy to lose track of what can and can’t be claimed when you are self-employed, given all of the different costs you’ll encounter. If you don’t know what you can claim for, you might miss out on opportunities to reduce your taxes and therefore pay more than you need to.
• Similar to the property allowance, where business expenditure is less than £1,000, the business owner may elect to deduct the trading allowance to reduce taxable business income.

Relief from Personal Pension Contributions

Personal contributions to a UK registered pension scheme entitles you to tax relief from HMRC. Therefore, if you are a basic rate taxpayer in England, HMRC will top up your pension contribution by 20%, meaning a contribution of £80 is worth £100. The government’s contribution is automatically provided at the basic tax rate.

Importantly, higher and additional rate taxpayers benefit from additional relief by an increase in the tax thresholds equal to the gross amount of the contribution. A higher rate taxpayer will therefore receive a further 20% tax relief as more of their income is taxed at 20% instead of 40%.

Anyone earning over £100,000 can use pension contributions to reduce their taxable income and help preserve their personal allowance.

There are certain restrictions on how much you can contribute depending on relevant earnings and how much you earn.

Venture Capital Schemes

If an individual has invested in a company which operates a venture capital scheme, they will be eligible for tax relief in the form of a tax reducer.  Current year investments may be carried back to the previous year, if this proves to be more beneficial in reducing the amount of higher rates of tax paid.

This tax reducer will be deducted from the tax liability in a similar way to the mortgage interest discussed above. There is a limit to how much a person can invest in a given tax year. Listed below are the four types of schemes which offer different levels of tax relief to the investor:

It may also be possible for a chargeable capital gain to be deferred when an asset has been sold, by reinvesting the gain into a qualifying venture capital scheme. By reinvesting this amount, the gain is frozen until these shares are sold in which case the gain will crystallise. An individual may choose to defer the whole gain or only part of it, depending on how much capital gains tax they wish to pay right away.

Get In Touch 

Consulting with your tax adviser can help maximize the tax relief available as well as outlining potential planning opportunities for owner managed and family run businesses. Get in touch with us today to benefit from our expert advice.

About Arnold Hill & Co LLP 

Arnold Hill & Co LLP is an accountancy and tax firm who have been delivering tailored accountancy services for over a century. Based in the heart of London, the firm is built on strong, lasting relationships and combine tradition with a forward thinking approach to meet the evolving needs of clients, both across the UK and internationally. The firm advise a range of clients ranging from UHNWI’s, family offices and entrepreneurs to growing businesses and multinational groups.

Shayun Dhokia - Personal Tax