Employment Expenses

Only expenses strictly necessary for the performance of employment can be deducted from income from work, and their definition is quite limited. If the employer pays or reimburses them, they are not subject to taxation.

Daily commutes to regular work are considered personal expenses and are therefore not deductible. However, if a worker is temporarily posted away from their usual place of work (for a period of up to 24 months), they can request relief for related travel and living expenses.

Refunds for business representation expenses and moving or relocation expenses up to a limit of 8,000 GBP are also exempt from tax, if certain requirements are met.

Personal deductions

Donations to UK charities may entitle you to tax relief, provided they are made through approved schemes, such as a payroll deduction, deeds of agreement or the Gift Aid program. Taxpayers with higher tax rates can claim additional relief through their tax return under the self-assessment system.

In addition, if at least 10% of a deceased person's estate is donated to charitable organizations, the applicable Inheritance Tax rate is reduced from 40% to 36%.

The Cultural Donations Program, in force since 2012, allows for a reduction of up to 30% of the value of a donated work of art, applicable to income tax or capital gains tax, when it comes to significant objects donated to the State.

Expenses without tax relief

Tax deduction is not allowed on the following expenses:

• Alimony.
• Medical expenses and child care.
• Social security contributions.
• City tax and other taxes in the United Kingdom.
• Most insurance premiums.
• Mortgage interest (except for commercially leased properties).
• Fines and penalties (with the exception of some related to commercial activity, such as parking tickets).
• Contingent liabilities.

Retirement planning

Anyone under 75 can participate in a pension plan registered in the UK, including non-residents (although some plans may restrict membership). There is no absolute limit on contributions, but there are tax caps:

Annual allowance:

• Up to 60,000 GBP, with gradual reduction if total income (including employer contributions) exceeds 260,000 GBP (as of April 2023).
• It is possible to use unused allocations from the previous three fiscal years.
• Contributions that exceed the allowance may be subject to a tax charge.

Tax relief:

• Personal contributions entitle you to tax relief up to the level of taxable work income.
• In plans managed by employers, contributions are deducted from gross pay.
• In personal plans, you pay with net income and the plan administrator claims a 20% reduction. If the taxpayer has a higher rate, they can claim the difference through self-assessment.

Lifetime allowance: eliminated since April 2023. It used to limit the cumulative total of tax-advantaged pensions (1,073,100 GBP).

Defined Contribution (CD) pension plans

Since April 2015, people over 55 years of age (57 since April 2028) can freely dispose of their defined contribution funds, with the following rules:

• The first 25% withdrawn (up to 268,275 GBP) is tax-free.
• The rest is taxed as ordinary income in that fiscal year.
• Free advice is offered to people over 50 years of age.

Death before age 75:
The fund can be transferred to any beneficiary, tax-free.

Death over 75 years of age:
The beneficiary can access the fund without limits, but they are taxed according to their marginal rate. If an entity (such as a trust) is paid, a 45% charge may apply.

Update after the 2024 Fall Budget

As of April 6, 2027, most unused pension funds and death benefits will be included in assets subject to Inheritance Tax. This will affect plans registered in the United Kingdom and qualifying non-British pension plans.

Key Features:

• Inheritance tax will be levied on unused funds.
• The zero-rate inheritance tax band will be distributed among all assets in the estate.
• The tax will be paid from the fund.
• The exemption for payments to spouses and charities is maintained.

Unapproved plans (FURBS and EFRBS)

Employer-funded supplemental plans. In general, FURBS are before April 2006 and EFRBS are later. Although they are not affected by the 2024 Budget, their fiscal profile is usually less favorable, since they are vulnerable to inheritance tax according to recent case law (case HMRC v Parry, 2020).

Access from abroad

A person who is a tax resident in another country who receives pensions from the United Kingdom can be taxed in both countries. To avoid double taxation, Double Taxation Agreements signed by the United Kingdom apply.

Foreign pensions

Since April 2017, residents of the United Kingdom have been taxed on 100% of foreign pensions, as well as British pensions. This eliminated the previously applicable 10% deduction.

Personal deductions

Most tax residents in the United Kingdom are entitled to a tax-free personal relief of 12,570 GBP for the 2025/26 tax year.

Reduction of personal relief

• This relief is gradually reduced if adjusted net income exceeds 100,000 GBP.
• For every 2 GBP of income above that threshold, the deduction is reduced by 1 GBP.
• Therefore, there is no personal relief available if income reaches or exceeds 125,140 GBP.

*Note: Adjusted net income is calculated by subtracting certain allowable deductions from total income, such as: Business losses, pension contributions and charitable gifts with relief (Gift Aid). Contributions to unions or police associations are not subtracted.

Non-residents and remittance base

Until April 5, 2025, taxpayers who choose the remittance tax base are not entitled to personal relief.

As of April 6, 2025, this regime will be eliminated, which will affect access to this relief (see changes to the remittance system in the personal income tax section).

Marriage Allowance

In fiscal year 2025/26, a person who does not pay income tax or who only taxes the basic rate can transfer up to 1,260 GBP of their personal relief to their spouse or common-law partner, provided that the recipient also taxes the basic rate at most.

The Requirements are:

• Both people must be married or in a civil union.
• Neither of them can be taxed at the higher or additional rate.
• This transfer allows the beneficiary spouse to reduce their tax bill by up to 252 GBP per year.

People born before April 6, 1935, are also eligible for traditional marriage allowance, as long as they meet the requirements. You cannot claim the marriage allowance (traditional) and the transfer of personal relief (marriage allowance) simultaneously.

*Note: The choice of the most suitable type of subsidy will depend on the couple's individual tax situation.

Business deductions

Self-employed workers in the United Kingdom can deduct certain expenses from their income, as long as they are exclusively for business purposes.

Deductible expenses

• Costs directly related to professional activity.
• Uncollectible debts that originated in the normal course of business.
• Pension contributions (only deductible when they are actually made).
• Accounting provisions accepted under Financial Reporting Standard 12, if they meet: Present obligation derived from a past event, a high probability of its occurrence and a reliable estimate.

Non-deductible expenses

• Entertainment or service to customers and potential customers.
• Depreciation recorded in accounting books.
• Loans to employees who have been discharged
• Future repairs (except for operating leases).
• Future operating losses.
• Restructuring costs without a formal plan and prior internal communication.

Capital assets

They are not immediately deducted (except under the cash method, which is optional for individuals and some companies).

Deductions apply through the Capital Deductions system, including:

• Annual Investment Deduction (AIA).
• Depreciation deductions.
• First-year deductions (limited, business “full expensing” does not apply to income tax).

Accounting and accrual

The accrual method and advance payments are accepted, and emoluments earned to employees must be paid within 9 months after the end of the financial year to be deductible, and provisions and contingencies must meet strict accounting criteria.

Losses

Individuals who exercise a trade, profession or vocation can record business losses. These losses are calculated according to the same rules as taxable profits.

Forms of relief for business losses:

Compensation with general income for the same fiscal year. For example: salaries, pensions, rents, etc. Subject to the fulfillment of specific conditions.

Compensation with income from the previous fiscal year. It allows a refund of taxes already paid.

Carry on losses. They can be offset by future earnings from the same profession or activity.

Relief for losses from the first or last financial year. Special rules allow for some flexibility in ascribing losses at the start or close of the business.

Losses in shares of unlisted commercial companies. They can be offset against capital gains, under certain conditions.

*Restrictions: Specific activities have limitations on compensating for losses. Example: agriculture, where repeated losses may lose their right to deduct after several years without benefits.

Limit on income tax deductions

In the United Kingdom, some income tax breaks are subject to a general limit: the greater of GBP 50,000 or 25% of the taxpayer's income. This ceiling only applies to deductions with no specific limit and that directly reduce general income subject to taxes.

Charitable donations and certain investments such as those made in EIS (Enterprise Investment Scheme) or SEIS (Seed Enterprise Investment Scheme) plans are excluded from the limit. Instead, it does affect compensation for business losses or interest on deductible loans.

Losses from unincorporated real estate businesses are now also subject to the limit, which may make incorporation as a company more attractive. Pension contributions are not affected, as they have their own caps.

In addition, since 2020, mortgage interest on rental properties is no longer fully deducted, but tax relief of 20% has been applied to these costs.

Related Party Transactions

Transactions between related persons must generally be made at market value for tax purposes, with the exception of exceptions between spouses or cohabiting domestic partners. If an asset is sold to a related person (other than a spouse or common-law partner) at a loss, this loss can only be offset by future earnings from transactions with that same related person. In addition, there are special rules for sales to related persons made on different occasions within a period of six years.