Are you missing out on potential tax reliefs?
What is tax relief?
Tax relief enables you to deduct the amount you pay to the government during a tax year from your tax payable to HMRC. Essentially meaning there is less tax for you to pay and we also call them tax reducers.
Tax reliefs can be claimed alongside any additional personal tax allowances you may be entitled to, allowing you to reduce your overall tax liability. There is a range of tax reliefs available which you can claim, subject to eligibility. This article will explore the reliefs that can be claimed through pensions and marriage allowances.
Typically, you can make arrangements with your employer to make payment before tax is deducted from your salary, so you save on tax as there is a reduced salary to be taxed on. You can also claim tax back from HMRC, usually in the case of charitable donations where you can also opt for Gift Aid.
You can also view the tax rates and allowances for the current and recent tax years here.
Tax relief on Marriage Allowances for basic-rate taxpayers
Married couples and/or civil partners can take advantage of the Marriage Allowance (MA). The MA allows individuals who are married or in a civil partnership to transfer a fixed percentage of their personal allowance to their significant other, by means of an election.
The amount that can be transferred to the receiving party is 10% of the personal allowance. Note that rounded up to the nearest £10. For example, 10% of the personal allowance of £12,570 is £1,2570 which will be rounded up to £1,260.
This is of particular benefit to a couple where one party has no taxable income, or their income is not enough to use their personal allowance. For example, an individual whose income falls entirely within the starting rate band.
If the MA is claimed by election, the relinquishing party has their own personal allowance reduced by the amount they transfer to the recipient.
The recipient on the other hand does not have their personal allowance increased and will remain at £12,570 for the 2021/22 tax year. However, the recipient does instead get a reduced tax liability imposed on them (or a “tax reducer”) equalling 20% of the transferred amount. For the tax year ending 5 April 2022, this tax reducer is computed at £1,260 x 20% = £252.
There are qualifying factors to determine whether the marriage/ civil partners can claim the MA, as follows:
- The individual who is relinquishing their personal allowance and the individual receiving must be married or in a registered civil partnership for all or part of the tax year when the election is being made. The couple does not need to be living together.
- The couple must not have claimed the Married Couples Allowance (an important distinction, find out more information on the MCA here. If the individuals qualify for MCA it is advised that they claim the MCA rather than the MA.
- The individuals must have been married or in a civil partnership during the tax year in which they are making the election for and at the time the election is made. Claims can also be made after the death of one individual by the surviving party, provided that marriage/partnership was active at the time of death.
- Importantly, neither individual is taxed above the basic rate bands. If any individual is taxed at higher or additional rates, they are not eligible.
- The election must happen no more than four years after the end of the tax year which corresponds to the claim. The election does apply to all subsequent years until conditions are no longer valid or withdrawn. You can go back up to 3 years to use the MA and save up to £1,000.
Consider the case of Samantha and Ali, who are a married couple. Samantha has an income of £35,000 per year through employment, and Ali has an income of £9,500 per year.
Ali decides to make a MA election. His personal allowance for the 2021/22 tax year is:
Less: MA transferred to spouse (max.)
Remaining personal allowance for Samantha
As we can see, Ali’s personal allowance after transferring MA exceeds his income by £1,810 which is wasted as personal allowances are not carried over to the next tax year.
On the other hand, Samantha will have the following tax liability on her income:
Less: Personal allowance
Tax reducer: (£22,430 x 20%)
Less: MA (1,260 x 20%)
Tax relief on Pensions
Tax reliefs on pension contributions are available for up to 100% of the annual earnings. This means if you earn £30,000 annually, you can get a relief of £30,000 paid to your pensions in the same tax year.
This is however capped at £40,000, which is the designated annual allowance for pension savings. You may like to avoid exceeding this limit, as any amount over this cap will be taxed as income and will be taxed at the highest rate applicable to you.
Super high earners, such as individuals earning more than £150,000 are exempt from this pension annual allowance. Instead, the maximum that an individual can contribute is reduced by £1 for every £2 earned over the limit, capped at £10,000. This applies to you if you earn at least £210,000 per year.
Keep in mind that you can also carry forward any unused allowances from the three previous tax years, given that you were part of the pension scheme in those years.
Tax relief is also provided based on the type of pension you have:
- Employer pension scheme
- If you are part of a pension scheme provided by your employer, in the majority of cases your contribution to the pension is deducted from your salary pre-tax.
- You are then subject to full tax relief on contributions at your highest tax rate immediately.
- Personal/ Stakeholder pension scheme
- The relief claim for this scheme operates different, as your premium is paid as a net of your basic rate tax. Your pension provider instead claims the balance from HMRC.
- Non-taxpayers can still contribute to pension and get a tax relief of 20% on the first £2,880 set aside for pension. The remaining £720 is contributed by the government giving a total of £3,600 net gross contribution.
Claiming tax relief
There are two main methods of claiming tax relief, as the claim is dependent on the type of pension the contributions are being saved into:
- Relief at source
Typically applies to private or self-employed personal pensions (SIPP). If the pension is paid through the employer, the employer takes 80% of the contribution from salary, with an extra 20% being provided by HMRC.
In this system, higher and additional rate taxpayers must complete a Self-Assessment for extra relief.
- Relief from “net pay”
In this case, the tax relief is claimed automatically and considered to be relief from “net pay”.
Contact us for more information on how you can claim tax relief as a basic-rate taxpayer.