What is tax relief?
Written by India Johnson
When you’re self-employed, understanding what you can and can’t write off your final tax bill can be confusing, to say the least. In this article, we’ll look at the ins and outs of tax relief – and what this means for your final bill.
The difference between tax relief and self-employed business expenses
First up, it’s useful to look make a distinction between ‘tax reliefs’ and ‘allowable business expenses’:
Tax reliefs: The term ‘tax relief’ is most commonly used to describe the non-business related expenses that provide a credit towards the total amount of tax you owe. Good examples of tax reliefs include pension payments and charitable donations (more on these below).
Business expenses: Business expenses are business-related things you spend money on and don’t have to pay tax on. For example, the rent you pay for your office, or the equipment you use for your job.
It’s worth noting that the Government sometimes refers to ‘tax relief’ as all of the above (so the non-business related expenses, and the business-related ones). But we think that can end up confusing things, and it’s widely accepted that tax relief means the stuff you can write off, but which isn’t a business expense.
So when we say ‘tax relief’, that’s what we mean.
Deducting tax reliefs from your total income
As a self-employed professional, you’ll have certain outgoings that you can take off your total income when it comes to paying your tax bill. This means you’ll pay less tax overall.
If you use Finmo, you can whizz through our app and tag all relevant transactions as ‘Tax Relief’, or create rules for specific transactions so this is done automatically.
What qualifies for tax relief?
Here’s a breakdown of what qualifies for tax relief:
Tax relief on pension payments:
As a self-employed person, you can get tax relief on pension payments into a personal pension and/or stakeholder pension. You just need to make sure the pension scheme you use is approved by HMRC for tax relief.
Tax relief on charitable donations
You can claim tax relief on charitable donation in two situations:
- If you donate through a Payroll Giving Scheme (where you donation to charity is withheld from your paycheck); or
- If you donate directly to a registered charity and are in the higher or additional rate income bracket.
With Gift Aid donations, the charity will be the one claiming the tax back from the Government in the form of 25p for every £1 donated.
- You donate £100 to charity – the charity claims Gift Aid (£100 x 25%) to make your gross donation £125.
If you pay tax above the basic rate (ie. you make more then £50k in taxable income), you can claim the difference between the rate you pay and basic rate on your donation. You can do this through your Self Assessment tax return or by asking HMRC to amend your tax code. For example:
- You donate £100 to charity – the charity claims Gift Aid (£100 x 25p) to make your gross donation £125. You pay 40% tax so you can personally claim a £25.00 benefit (£125 x 20%).
Tax relief on some types of rental income
You can get tax relief on some specific types of rental income, which are:
- The money you make from renting out furnished rooms in your home (so not a separate property to the one you live in). In this case, you can get up to £7,500 of tax-free rental income under the Government’s Rent a Room scheme.
- The money you make from other types of rental income from your home, for example, if you rent out a parking space on your drive or charge someone to store their items on your property. You get tax relief on up to £1,000 of this.
Business property relief
When people inherit assets – like personal property or money – they usually have to pay tax on them. This is called inheritance tax. Business property relief (BPF) is a type of tax relief that means you don’t have to pay tax on certain types of inherited business property. For example, if you inherited assets from your family business, they may qualify for BPF, meaning you wouldn’t need to pay tax on them.
Tax relief on certain investments (venture capitalist schemes)
There are a handful of venture capitalist schemes that mean you can get tax relief on investments in certain companies or social enterprises. The schemes are:
To find out more about the self-employed business expenses you can claim, check out our useful articles:
Still a bit confused? Finmo can help!
Our app makes it easy to whizz through your bank statements tagging transactions as ‘business’, ‘personal’, or ‘tax relief’, and our experts are on hand to help answer any queries you have throughout the process. The Escalate feature lets you send transaction queries to our advisors and accountants to be reviewed. Our app is free to use our app/portal to track your income and expenses, or you can check out our plans to find out more about getting ongoing accountancy support.