Tax relief in the UK: everything you need to know
In the world of financial management, optimising your tax claim to improve your financial performance in a specific time period, while staying within the bounds of the law, is crucial. In this guide, we paint a comprehensive picture of the tax relief landscape in the UK, so you can plan your finances like a pro and make better financial decisions.
From decoding the tax code to financial forecasting (future projections) and financial modelling (forecasting revenue and future spending) we have got you covered.
Here is a deep dive into the intricate yet exciting world of UK taxes, and our financial and accounting experts are here to help you navigate them for successful decision-making and healthy business performance.
Overview:
What are tax reliefs?
Entrepreneurs can tap into several government schemes, tax incentives, credits, and tax reliefs to help their business off the ground while writing off some of the tax expenses. Gathering past financial data and having a clear record of this historical data, whether of the current tax year or previous fiscal years, is important for making such claims.
But before we delve into that, let’s understand what are tax-deductible business expenses and how careful accounting can improve your bottom line, balance sheet, and financial forecasts. A tax-deductible business expense is a tax break or tax relief that reduces your tax liabilities, thereby improving your income statement in particular, and cash flow statement in general.
This can be in the form of tax incentives like SME Research and Development Tax Credit Scheme, Seed Enterprise Investment Scheme, or in the form of business rate reliefs which are discounts from local councils.
What you pay, therefore, depends on factors such as the number of employees, the industry that your business operates within, or your circumstances. For instance, if your company has a component of innovation, you may be able to claim a rebate. If you buy an electric vehicle for business use, you may be able to write off 100% of its cost.
Additionally, if you are self-employed, several office expenses such as stationery, heating and electricity, bank charges, and insurance are seen as tax-deductible business expenses.
These schemes are a great way to ease financial pressure and grow your business by reinvesting your savings from the tax breaks. If you feel you don’t know where your company stands and which schemes it can use to reduce tax liability, reach out to an expert – either a financial advisor or an accountant.
But be careful with who you hire, because HMRC puts the onus of responsibility on you and not your advisor.
You can also reach out to Sleek to understand various tax reliefs, and how they apply to your financial situation to build an effective financial strategy, aimed at achieving your financial goals. Our finance and accounting teams have past expertise in helping several businesses in diverse industry verticals in the country.
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What tax reliefs are available in the UK?
Based on the size of your business and whether you employ others, there are two types of lists of tax reliefs and allowances, mentioned below:
1) For self-employed or those running a small business
Tax-deductible business expenses
For the self-employed in the UK, several running costs can be deducted as part of the annual tax return. This will also help you work out your taxable profit. However, these should be allowable expenses – such as office stationery, heating and lighting, insurance, and bank charges.
For instance, if your turnover is £50,000 and you claim £7,000 in allowable expenses, you will only have to pay tax on the remaining profit of £43,000.
Also, note that if you work from home, you might be able to claim for costs like Council Tax, internet and telephone bills, and mortgage interest rates.
The calculation usually goes like this: If you have two rooms in your house but use one as an office and the electricity bill comes to £80, your allowable expense for business tax will be the electricity bill divided by the number of rooms, multiplied by number of rooms used as an office. In this case, the allowable expense will come to (£80/2)x1 = £40.
Research and development tax credits
HMRC allows for tax relief for projects involved in innovation in science and technology – even for unsuccessful projects.
Additionally, to qualify for this relief, the project must be related to your company’s trade. To avail the claim, you will also be required to explain how your project is paving the way for advancement in your said field, and how it overcomes or proposes to overcome technological uncertainty.
Gift aids
Your company, even if it’s an unincorporated association, can qualify for tax relief if donations were/are paid to charitable organisations, which include trusts and bodies treated as charities for UK tax purposes.
Only money, equipment or its own trading stock, sponsorship payments, land, property or shares in another company given as charity are considered in tax reduction.
For sole traders, donation through gift aid, your will, or your own wages or salary to charity or community amateur sports clubs is also considered.
The calculation is simple. Deduct your donation from total profit before considering it for tax obligations.
Business rates relief
Based on where in the UK your business is, you might be eligible for a reduction in business rates – the rules for which are different in each country.
As per HMRC rules, you can get a business rate relief if you are a small business, a retail, leisure, or hospitality property, the sole business in a rural area, a charity or a community amateur sports club, or a local newspaper.
You will also be eligible for a discounted business rate if your property is in a heat network, freeport, or enterprise zone or if you are in financial difficulty. Additionally, our local council may also be able to give you better discounts on business rates.
You might also be exempt from paying business rates, for instance, if the property you have is agricultural land or buildings, if the property is used for the welfare of disabled people, or if the property is registered for religious worship.
Corporation tax relief
While preparing your company’s accounts, you might be able to deduct the costs of running your business from profits before tax. For instance, if you buy or have bought machinery or tools for business purposes, the cost will be treated as an allowance or relief. However, if you purchase these things for personal use, they will be treated as benefits.
You might also be eligible to claim if your business is part of the creative industries (animations, video games, film and television, theatre, etc.) or is involved in research and development.
Additionally, you will be eligible for a claim if you are shutting down your company to become a sole trader, a limited partnership, or an ordinary business partnership.
If your company is incurring property income losses, trading losses, or capital losses, it might be qualified for corporate tax relief as well.
Additionally, if your company is making a profit from patented innovations, you can file a claim against the Patent Box Scheme.
“Marginal Relief” deserves a mention here because it allows relief on taxable profits between £50,000 and £250,000, starting April 2023.
2) For businesses that employ people
Employment Allowance
Under this allowance, eligible employers can decrease annual National Insurance liability by up to £5,000.
As per HMRC rules, you can claim this allowance if you are a charity or a business and your employer’s Class 1 NI obligations were below £100,000 in the preceding tax year. In the definition here, charities include community amateur sports clubs. You can also claim employment allowance if you hire a care or support worker.
The employment allowance can be claimed for the previous four tax years.
Hiring an apprentice
You might be eligible for support from the government if you hire apprentices and train them. Depending on the apprentice you hire, you might be eligible for an additional payment of £1,000. The amount will also depend on whether or not you pay the apprenticeship levy.
Hiring a veteran
If you hire a veteran from the UK armed forces in the first year of their private/civil employment, you can apply a zero-rate of secondary NI contributions for them. The zero-rate would be applicable for up to 12 months.
Other tax reliefs for individuals
Maintenance Payments Relief
There is another tax relief that needs a mention – Maintenance Payments Relief. Anyone can claim it on their income if they make maintenance payments to a partner – ex-civil partner or ex-spouse. It’s worth 10% of the maintenance paid, up to an upper cap of £401 per year. The conditions that need to be satisfied in order to make a successful claim are:
- either of you were born prior to 6th April 1935
- the maintenance payments are made under a court order, post the relationship termination
- the payments maintain an ex-spouse or civil partner (only if they are now not remarried or in a new civil partnership) or your children who are below the age of 21
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Who is eligible for UK tax relief?
People under the age of 75 usually qualify for tax relief.
Additionally, to be eligible for tax relief, it is required that an individual have one or both of the following qualifications:
Have earnings within the UK
The earnings should be subject to income tax in a specific fiscal year. This covers income that is subject to UK income tax laws.
Be a resident in the UK at some time during the tax year
A resident is someone who maintains a significant presence in or relationship with the country. This can change depending on the individual and the tax year.
Things to keep in mind while considering eligibility for UK tax relief
Eligibility requirements for tax relief may change with changes in tax laws, so it is advised that you speak with tax professionals in case of any query.
How do I claim tax relief in the UK?
It is essential to keep precise records of past, current, and future revenue and expenses – all financial statements from historical data on expenses to future financial projections and business performance.
You’d be surprised how many people forget to keep receipts or charge the bill on the right card, losing out on tax reliefs.
So always ensure you gather past financial statements such as previous balance sheets, cash flow statements, and bills with a certain religiosity, in either a hard folder or on the cloud.
There are many apps now available that can read from a variety of bills and invoices, saving them in the cloud at the convenience of a click.
Remember, these are required to begin a tax relief application, via HMRC postal form, and will be used as supporting documentation for claims.
What is an example of a tax relief?
The government offers tax relief on pension contributions. This means that instead of paying income tax on this amount, you contribute it to your future, delaying your tax liability and saving up for your retirement.
To illustrate, if you earn £40,000 per year and contribute £4,000 to your pension, instead of being taxed on £40,000, you will be taxed on £36,000 (assuming basic rate tax).
To have accuracy in your financial statements, it’s important to have accuracy in your historical data as well as future financial projections. This is because to have healthy and realistic financial statements, it’s essential to know cash inflow and cash outflow as accurately as possible.
In fact, a good understanding of inflow, outflow, tax breaks, or tax relief will also help you refine your financial forecasting methods and improve your financial data. This also helps in the proper financial modelling of your business needs, cash flow in particular, and revenue and expense in general.
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Conclusion
In conclusion, harnessing the full power of tax reliefs can significantly improve your financial statements – especially the balance sheet and the bottom line – thereby creating better, more realistic, and more accurate financial analysis. This includes financial forecasting as well as financial modelling.
It is also important to understand tax processes, practices, and calculations followed in your jurisdiction to better handle future shortfalls. Cash flow statements, historical data for revenue and expenses, financial forecasts, income statements, and forecasting financial performance, all help in this direction.
A consultation with Sleek‘s finance and accounting teams can help you fine-tune your financial accounting – past, present, and future revenue and expenses.
FAQs
Tax relief refers to deductions, exemptions, or credits offered by the government to reduce the amount of income tax. Tax breaks are used to incentivise specific behaviour as well, such as saving for retirement or supporting charitable causes.
Eligibility varies depending on the tax laws of your country/jurisdiction. Generally, individuals and businesses qualify for tax relief by meeting residential or income criteria.
Tax relief can take many forms, including relief on pension contributions, business expenses, charitable donations, and more.
To claim tax relief, you need to follow the procedures outlined by your tax authority. Consulting with tax experts or using tax software can help ensure you accurately claim the relief you’re entitled to.
Usually no. HMRC does not approve such schemes and companies making these claims should be viewed with suspicion.
Discover the multifaceted ways in which Sleek can assist you in harnessing the full spectrum of tax reliefs, credits, and tax breaks, trimming your tax bill, and fortifying your financial statements.
