Allowances and reliefs that can reduce your Income Tax bill

If you’re due to pay Income Tax, there are a number of deductible allowances and reliefs that can reduce your tax bill. These include:

• Married Couple’s Allowance – the husband, wife or civil partner has to be born before 6 April 1935
• Maintenance Payment Relief – either you or your former spouse or civil partner must have been born before 6 April 1935

Unlike the tax-free allowances, these aren’t amounts of income you can receive tax-free. Rather they’re amounts that can reduce your tax bill.

Tax on company benefits

If you’re employed and you receive non-cash benefits from your employer you will have to pay tax on them.

Taxable benefits

Benefits that you might have to pay tax on include:

• company cars or vans
• fuel provided for your vehicle
• medical insurance
• living accommodation
• loans at low interest rates

Step two – add up your tax free allowances

Tax-free allowances are amounts of income you can get without paying tax. They include the Personal Allowance and the Blind Person’s Allowance.

Personal Allowance

Everybody gets the basic Personal Allowance, but if you’re 65 or over and your income is below certain levels the rate increases.

Note: If your income is over the income limit, HMRC will reduce the age-related allowance by half of the amount – £1 for every £2 – you have over that limit, until the basic rate allowance is reached.

You’ll always get the basic allowance, whatever the level of your income. So if, for example, you’re 66 and have an income of £23,500 (£600 over the limit) they would reduce your age-related allowance of £9,490 by £300 to £9,190.

Taxpayer: worked example

You are 76 and registered blind. You’ve added up your taxable income and it comes to £19,000.

• your taxable income is £19,000
• your tax-free allowances add up to £11,530 (age-related Personal Allowance of £9,640 plus Blind Person’s Allowance of £1,890)
• you subtract your tax-free allowances (£11,530) from your taxable income (£19,000) – this leaves you with taxable income of £7,470

Non-taxpayer: worked example

You are 46 and have a part-time job. Your taxable income is £4,500.

• your taxable income is £4,500
• your tax-free allowance is £6,475 – the basic Personal Allowance
• you subtract your Personal Allowance (£6,475) from your taxable income (£4,500) and find that you don’t need to pay tax on your income
• if you have been paying tax, you may be due a refund

Allowances that can reduce your tax

Taxable and non-taxable income at a glance

Not all income is taxable. You can also receive some normally ‘taxable’ income ‘tax-free’. The lists below will help you to work out what income counts as ‘taxable’ and ‘non-taxable’ – and what taxable income you can receive tax-free.

What counts as taxable income?

Income from employment

• includes income from full, part-time and temporary employment
• if you get perks or benefits from your employer these may also be taxable

Income from self employment/partnerships

Profits you make from working for yourself as a sole trader or partner.

Pension income

• State Pension
• personal or company pensions
• retirement annuity

Interest on savings

• bank and building society interest – not including Individual Savings Accounts (ISAs) and Personal Equity Plans (PEPs)
• National Savings and Investments accounts and bonds

Investment income

Dividends on company shares - not including dividend income from ISAs and PEPs.

State benefits

The most common taxable state benefits are:

• Carer’s Allowance
• Jobseeker’s Allowance
• Employment and Support Allowance – ‘contribution’ based (if you have paid enough National Insurance contributions)
• Incapacity Benefit - from week 29
• Weekly Bereavement Allowance

Rental income

• from a lodger in your only or family home if more than £4,250 a year (£2,215 if split jointly)
• from a second property

Other taxable income

• pensioner bonds
• trust income

What counts as non-taxable income?

State benefits

The most common non-taxable state benefits are:

• Disability Living Allowance
• Attendance Allowance
• lump sum Bereavement Payments
• Pension Credit
• free TV licence for over 75s
• Winter Fuel Payments and Christmas Bonus
• Housing Benefit
• Employment and Support Allowance – income based (if you haven’t paid enough National Insurance contributions)
• first 28 weeks of Incapacity Benefit
• Income Support – certain payments
• Child Benefit
• Guardian’s Allowance
• Maternity Allowance
• Industrial Injuries Benefit
• Severe Disablement Allowance
• War Widow’s Pension
• Young Person’s Bridging Allowance

Interest on savings

• all ISAs and PEPs
• Savings Certificates

Rents

• first £4,250 a year from a lodger in your only or family home – £2,125 if split jointly

Tax Credits

• Working Tax Credit
• Child Tax Credit

Premium Bonds

Wins from Premium Bonds are free from UK Income Tax and Capital Gains Tax.

Taxable income that you can receive tax-free

Everyone is entitled to receive a certain amount of taxable income tax-free during the tax year. This is called the Personal Allowance and it increases from age 65.

If you’re certified blind and on a local authority register of blind persons, or if you live in Scotland or Northern Ireland and you are unable to perform any work for which eyesight is essential, you can claim Blind Person’s Allowance. As with the Personal Allowance, this is an amount of taxable income you can receive during the tax year without paying tax.

Ways you pay Income Tax

If you’re an employee or receive a company pension

If you’re an employee your employer will deduct Income Tax from your wages throughout the year using the tax code HM Revenue & Customs (HMRC) provide to them, sending the deductions back to HMRC. If you get a pension, your pension provider will deduct tax in the same way. This system of collecting Income Tax is known as Pay As You Earn – usually shortened to PAYE.

If your circumstances change and you are given a new tax code, HMRC will send you a ‘PAYE Coding Notice’. This tells you what your tax code is and how they worked out the tax-free income you can receive. Keep all notice of coding letters in case you’ve got any questions or need to check you’re paying the right amount of tax.

At the end of the tax year HMRC may also send you a P810 Tax Review Form. This is a simple one page form that is used to check that your tax code is still correct. If you get form P810 you’ll need to fill it in and send it back as soon as you can.

If you prefer you can call the number on the form and give the information over the phone. You can tell them about other income you’ve received or about changes that may reduce your tax bill. If the information you give shows that you’re paying the wrong amount of tax, they can change your tax code straight away to correct this.

If you have complex tax affairs you may also have to complete a Self Assessment tax return.

If you’re self-employed

If you’re self-employed you’ll need to complete a Self Assessment tax return. You can complete and file your return online or fill in a paper form. You’ll probably need to pay any Income Tax you owe for a tax year in two instalments plus a final ‘balancing payment’.

Filling in your tax return online is easy and quick – and you can do it at any time of the day or night. Online tax returns are processed faster than paper returns, which means that if HMRC owe you any money you’ll get it more quickly. Your tax is also worked out automatically as you fill in the form so you’ll know what you owe – or are owed – right away.

If you’ve got complex tax affairs

If you’ve got complex tax affairs – for example if you earn money from rents or investments above a certain level – you may need to complete a tax return. You may have to do this even if you’re already on PAYE. But if you are on PAYE, HMRC may still be able to collect some or all of your Income Tax this way.

Income Tax deducted at source from savings income

Interest on most savings has 20 per cent tax deducted before you receive it. If you’re a basic rate taxpayer you’ll have no further tax to pay. If you’re a non-taxpayer you may be able to claim some tax back. If you’re a higher rate taxpayer you’ll have more tax to pay.

Some taxpayers may need to fill in a tax return or a form P810 Tax Review Form to make sure they’re paying the right amount of tax.

How to pay tax on extra income

You may be able to choose how you pay tax on any extra income you earn – either through PAYE throughout the following tax year or through Self Assessment by way of an additional payment.

If you’re an employee or a pensioner and you want to pay tax on some of your non-employment income – like investment and rental income – through PAYE rather than by Self Assessment you can ask HMRC to collect it this way. You can do this for up to £2,500 of extra income in a year. If you earn more than £2,500 from savings, investments or rental income you’ll need to fill in a tax return.

If you don’t want to pay tax on your non-employment income through PAYE, you can ask HMRC to stop collecting it this way. You’ll pay through Self Assessment instead. If you want to do this you can register for Self Assessment Online (if you’re not already registered). Or you can download a paper tax return to complete. Send this to HMRC with a letter to say you want to pay tax through Self Assessment.