Last edited 30 Oct 2014

Tax relief

Tax Relief describes a situation in which an individual or company's liability to tax is reduced as a result of an entitlement to claim allowances or offset certain permitted expenditures against income.


[edit] Individuals

Individuals are entitled to personal allowances which provide tax relief by reducing taxable income. They can also obtain tax relief if they are able to utilise other allowances which HM Revenue and Customs permit in certain circumstances.

[edit] Personal Allowances

These are set by HM Government and usually change each financial year to take account of changes in the cost of living. From time to time however these allowances may remain unchanged for a longer period of time. Depending upon the particular circumstances of each individual, the amount of the allowance is free from assessment to tax. The level of personal allowance depends upon age and also income.

For 2014/15 Personal Allowance:

  • under 65 years of age £10,000
  • 65 - 74 £10,500
  • 75 and over £10,660

If an individual's income exceeds £100,000 the amount of the allowance reduces by £1 for every £2 income exceeds £100,000. Thus it can be seen that at an income level of £116,210 the allowance for an individual under 65 disappears completely.

Equally the higher allowances for older individuals are gradually reduced in much the same way as is the case for the basic personal allowance above £100,000. For 2014/15 the age related allowances begin to reduce at a rate of £1 for every £2 of earnings above £27,000 per annum.

Married Couples Allowance is available where one partner is at least 75 years of age in the financial year in question. Married Couples Allowance provides tax relief at 10%.

[edit] Pension Contributions

Individuals may obtain tax relief by contributing to personal or occupational pensions schemes with a view to building up a fund to provide income in retirement. Contributions made in this way entitle the individual to tax relief at their marginal rate of tax. For a 40% taxpayer therefore, tax relief of £20,000 may be obtained against a contribution of £50,000. There are detailed rules and limits governing pension schemes and amounts that may be contributed, more details of which are available from HM Revenue and Customs.

[edit] Gift Aid/Deeds of Covenant

Tax relief is available to support charitable giving. For a U.K. taxpayer the amount of the gift is deemed to be net of basic rate tax. In "grossing up" the value of the gift, relief is obtained at the taxpayers marginal rate. At the same time, the recipient of the gift can reclaim the basic rate of tax deducted at source.

[edit] Enterprise Investment Schemes (EIS)

Tax relief is also available to individuals who are prepared to invest in new businesses. The EIS pemits relief of 30% on the investment into shares in approved companies upto a maximum of £5,000,000. Thus maximum tax relief of £1,500,000 is available if the investors have sufficient taxable income against which the EIS relief can be set. There is also a carry - back provision which permits the tax relief to be set against income tax liability arising in the tax year immediately prior to the year in which the share acquisition is effected. Shares must be held for a mnimum of three years otherwise the tax relief granted will be withdrawn.

[edit] Companies

Companies and non-incorporated businesses obtain tax relief by setting business running costs against income. They can also obtain relief by claiming capital allowances when they purchase assets for use in their businesses.

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