Income Tax

Cash basis accounting is a simplified method used by sole traders and other unincorporated businesses to work out income and expenses for self-assessment in a straightforward manner. 

The cash basis is the default method for calculating income and expenses for self-employed individuals and partnerships when completing their Income Tax self-assessment return. Businesses that prefer traditional accruals accounting, or are not eligible for cash basis, must opt out of the cash basis when submitting their return.

One of the main benefits of cash basis is that businesses only record income when payment is received and expenses when they are paid. This means they do not pay Income Tax on money they are still waiting to receive, which can help improve cash flow management.

The scheme can also simplify accounting records. Equipment purchased for business use can usually be claimed as an allowable expense rather than through capital allowances, making the process more straightforward.

Cash basis is available to sole traders and partnerships without corporate partners. However, limited companies, limited liability partnerships and certain other businesses cannot use the scheme. Traditional accounting may also be more suitable for businesses with complex arrangements, significant stock levels or those needing accounts for finance and funding purposes.
 

The £1,000 property allowance is a helpful for individuals with small amounts of property income. The allowance provides a tax exemption of up to £1,000 a year against gross property income, meaning some landlords may not need to report their income to HMRC.

The allowance applies to income from land or property, such as renting out a driveway or other small property-related income. If your total gross property income for the tax year is £1,000 or less, you will not usually need to tell HMRC or include this income on a tax return, provided you are eligible to use the allowance.

If you own property jointly with others, each person can claim their own £1,000 allowance against their share of the gross rental income. Where property income exceeds £1,000, you will normally need to declare the income and can choose whether to deduct the £1,000 allowance or claim actual allowable expenses. However, you cannot deduct more than the amount of your income to create a loss.

The property allowance cannot be claimed in certain circumstances. For example, it cannot be used where the income is from a property business connected to a company or partnership involving you or someone connected to you. It also cannot be used if you claim the tax claim  for residential property finance costs, such as mortgage interest, or if you use the Rent a Room Scheme and deduct actual expenses instead.

Employees who use their own vehicle for business journeys may receive Mileage Allowance Payments (MAPs) from their employer. These payments can be made tax-free up to HMRC’s approved amount, calculated by multiplying business miles travelled by the relevant rate per mile.

Effective since 6 April 2026, the approved mileage rate for cars and vans increased to 55p per mile (from 45p) for the first 10,000 business miles, with 25p per mile (no change) applying above this threshold. Motorcycle mileage remains at 24p per mile and bicycle mileage at 20p per mile.

If an employer pays more than the approved amount, the excess must be reported to HMRC and taxed through payroll. If an employer pays less than the approved amount, the employee may be able to claim Mileage Allowance Relief on the unused balance.

Separate National Insurance rules apply to mileage payments. Employers may need to pay Class 1 National Insurance on amounts above the qualifying amount, although no National Insurance is due where payments are below the threshold.

There is an additional 5p per passenger per business mile for carrying fellow employees in a car or van on journeys which are also work journeys for them. Only payments specifically for carrying passengers count and there is no relief if you receive less than 5p or nothing at all.

Some self-employed individuals experience significant fluctuations in their profits from one year to the next. When this happens, HMRC’s averaging relief may help to regularise tax payments by levelling profits across more than one tax year.

However, the relief is only available to limited groups of taxpayers. Farmers and market gardeners can claim to average profits over either two or five consecutive tax years, while creators of literary or artistic works, such as authors, artists and composers, can average profits over two consecutive tax years.

Averaging relief is intended to reduce the impact of unusually high or low profits in a particular year. By spreading profits over the relevant period, it may reduce the amount of tax payable where income would otherwise push a taxpayer into a higher tax band or affect National Insurance liabilities.

The relief is most beneficial where your tax position differs between years. For example, it may reduce your tax bill if you pay tax at the basic rate in one year and the higher rate in another, or if your income falls below your personal allowances in one year but is taxable in another. However, it is unlikely to provide any benefit if you are already paying the highest rate of tax and Class 4 National Insurance contributions in every year being averaged.

The relief is not available to companies and generally cannot be claimed by businesses using the cash basis. Specific conditions must also be met before a claim can be made, including rules on the level of profit fluctuations between the relevant tax years.

Claims are made through self-assessment for the latest tax year. Rather than requiring earlier tax returns to be amended, HMRC adjusts the tax and National Insurance position for the claim year to reflect the averaging calculation.

If your profits vary considerably from year to year and work in a qualifying business, it is worth checking whether averaging relief is available. Claiming the relief where eligible could reduce your tax bill and provide a fairer reflection of your business profits over time.

If you pay for replacing or repairing small tools you need for your job, you may be able to claim tax relief from HMRC. Eligible tools include items such as scissors, small hand tools and electric drills that are essential for carrying out your work and are not provided by your employer.

You may also be able to claim tax relief for the cost of cleaning, repairing or replacing a uniform or specialist work clothing, such as overalls or safety boots. However, you cannot claim for the initial cost of buying work clothing, everyday clothes worn for work, or the cost of laundering a uniform if your employer provides a free laundry service that you choose not to use.

If your role requires personal protective equipment (PPE), your employer is responsible for providing it free of charge or reimbursing you for the cost. You cannot claim tax relief on PPE yourself.

Claims can be based on the actual amount you have spent, provided you keep receipts or other evidence, or you may be able to claim a fixed flat rate expense if one has been agreed for your occupation. Flat rate claims do not require supporting evidence.

HMRC normally allows claims for the current tax year and up to four previous tax years, provided they are submitted within four years of the end of the tax year in which the expense was incurred.
Most employees can claim online using HMRC’s portal https://www.tax.service.gov.uk/claim-tax-relief-expenses/what-claiming-for. Taxpayers who complete a self-assessment tax return should claim the relief through their tax return.

Receiving money from a family member can be a welcome source of financial support, but many people are unsure whether they need to pay tax on it. In most cases, the person receiving a gift does not pay Income Tax on money given by family. However, the gift could have Inheritance Tax implications for the person making the gift.

Inheritance Tax may become an issue if the person giving the money dies within seven years of making the gift. Gifts made during this period may be included when calculating the value of their estate, depending on the amount given, who received it and when it was made.

Gifts can include money, property, land, personal possessions and shares. If someone sells an asset to a family member for less than its market value, the difference may also count as a gift.

There are several exemptions and allowances that allow people to give money without it becoming liable for Inheritance Tax. Each tax year, an individual can give away up to £3,000 known as the annual exemption. They can also make unlimited gifts of up to £250 per person, provided another exemption has not been used for the same recipient.

Certain wedding gifts are also exempt, including gifts of up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to other individuals.

Regular financial support may also be exempt if it is paid from normal income and the person giving the money can still afford their usual living costs. This could include helping with rent, supporting an elderly relative or contributing into a savings account for a child under 18.

Anyone making significant gifts should ensure they keep records showing what was given, to whom, the value and the date of the gift as this may have Inheritance Tax implications in the future.

With childcare costs continuing to rise, many working families could be missing out on valuable support through the Tax-Free Childcare scheme. The scheme helps eligible parents pay for registered childcare by providing a government top-up on their contributions. For every £8 paid into a childcare account, the government adds £2.

Tax-Free Childcare can be used to pay for a range of approved childcare providers, including childminders, nurseries, nannies, after-school clubs and holiday clubs. The government contribution is capped at £500 every three months, providing up to £2,000 a year per child. For children with disabilities, the maximum increases to £1,000 every three months, or £4,000 a year.

The scheme is available to many working parents, including those who are self-employed. You will usually need to be working, or returning to work, and earning at least the equivalent of the National Minimum Wage or Living Wage for 16 hours a week. Both employed and self-employed workers can qualify, as well as those on certain types of leave, including maternity, paternity and adoption leave.

Children are generally eligible until 1 September after their 11th birthday, or until 1 September after their 16th birthday if they are disabled.

However, there are restrictions. You cannot usually claim Tax-Free Childcare if you or your partner’s expected adjusted net income is more than £100,000 a year, or if you receive Universal Credit or childcare vouchers. Parents must set up a childcare account and sign-in every 3 months to confirm they remain eligible. 

Many employees and business owners have welcomed higher earnings over the past few years. However, for a growing number of taxpayers, a larger salary does not necessarily mean significantly more money in their pocket.

The reason is a process known as fiscal drag.

Although tax rates have remained broadly unchanged, personal tax thresholds have been frozen for several years. As wages increase, more people are finding themselves paying tax at higher rates, even if their pay has only kept pace with inflation.

This means that someone who previously paid only the basic rate of Income Tax may now be paying tax at 40%, while others may have moved into the additional rate band. The effect can be surprisingly expensive, particularly when combined with the loss of valuable tax allowances.

Moving into a higher tax band can affect far more than your Income Tax bill. It may reduce your Personal Savings Allowance, increase the rate of Capital Gains Tax payable on certain assets, and expose you to the High Income Child Benefit Charge. Individuals with income above £100,000 may also begin to lose their Personal Allowance, creating an effective marginal tax rate of 60% on part of their income.

Business owners should also remember that higher personal income may affect the most tax-efficient way of extracting profits from their company. The balance between salary, dividends and pension contributions should be reviewed regularly rather than simply carried forward from previous years.

Fortunately, there are often legitimate ways to reduce your taxable income. Pension contributions remain one of the most effective planning opportunities, while Gift Aid donations can also extend the basic rate tax band. Business owners may benefit from reviewing the timing of dividends, bonuses or other income where flexibility exists.

The important point is not to assume that a higher salary automatically leaves you better off after tax. A modest increase in income can sometimes trigger unexpected tax consequences that outweigh much of the additional earnings.

If your income has increased recently, now is an excellent time to review your overall tax position. Early planning can often reduce your tax liability while ensuring you continue to make the most of the reliefs and allowances available.

If you would like us to review your personal tax position or discuss ways to improve your tax efficiency, please contact us. We will be pleased to help you identify opportunities to minimise your tax bill while remaining fully compliant with HMRC's rules.

Not every hobby becomes a taxable business, but it is important to be aware when this can happen. This can apply even if you are making some money from your hobby. HMRC looks at a range of factors to decide whether an activity is a genuine trade, including whether there is a business intention behind it or whether it remains a personal interest.

A hobby can gradually develop into a business, particularly where activities become more regular, organised or profit-focused. For example, repairing cars, selling collectibles or making items to sell may generate income, but this alone does not automatically mean a person is carrying on a business. HMRC considers whether the activity passes the “business test” when deciding if tax rules apply.

Small-scale or occasional sales from hobbies will not usually be treated as a business. However, where a hobby grows into a more substantial activity, it may create tax obligations. Many successful businesses have started as hobbies.

Where income does become taxable, there are two separate £1,000 tax-free allowances that may help:

• the trading allowance for income from self-employment, casual services or hiring out personal equipment
• the property allowance for gross property income, such as renting out a driveway

If either relevant allowance covers all the income from that activity, the income is tax-free and does not need to be declared. If income exceeds £1,000, the allowance can sometimes be deducted instead of actual allowable expenses when calculating taxable profits.

If you are self-employed, claiming all of your allowable business expenses can reduce your taxable profit and, in turn, the amount of Income Tax you pay. Allowable expenses are costs that are incurred wholly and exclusively for the purposes of your business.

Typical business expenses that can be claimed include office costs such as stationery and telephone bills, travel expenses, business insurance, advertising and marketing, staff costs, stock and raw materials, and the running costs of your business premises. You may also be able to claim the cost of training courses that help you maintain or improve the skills needed for your business.

Where an expense is used for both business and personal purposes, you can only claim the business element. For example, if you use your mobile phone for both work and personal calls, only the business proportion of the bill is allowable.

If you work from home, you may be able to claim a proportion of household costs such as heating, electricity, internet, rent or mortgage interest, provided they relate to business use. Simplified expense allowances allow qualifying claimants to use flat rates for certain expenses, including working from home and business mileage, instead of calculating the actual costs.

If you purchase equipment, machinery or business vehicles, the cost may qualify for tax relief through capital allowances, depending on the accounting method you use.

If you claim the £1,000 trading allowance, you cannot also claim allowable business expenses. Keeping accurate records throughout the year will help ensure you claim all the tax relief you are entitled to while making it easier to complete your tax return.