There are a few exceptions, but we can advise you on those. The following are some examples of how this tax relief works:
Example 1,
Gillian is a higher rate taxpayer in full time employment.
She also rents out a field she owns for £1000 per annum, but in the process spends £50 on a gate repair in the field.
She has 2 options re paying tax on the income from her field:
1. Treat all the income as exempt from Income Tax – so there is no tax to pay on the £1000 she has received.
2. Calculate the profit she makes renting the field using normal principles, and pay tax on £950 (£1000-50).
Gillian should choose option 1, because option 2 costs £380 more in tax.
Example 2
Bob is a basic rate taxpayer who has a full time job in employment.
In addition, he has recently started a small photography business. In his first year trading as a photographer he receives £3000 gross income from selling his pictures, and incurs £500 business expenses.
He has 2 options re paying tax on income from his new business :
1. Treat £1000 of the income as exempt from Income Tax and pay tax on £2000 (£3000-£1000)
2. Calculate the trading profit on his photography business using normal principles and pay tax on £2500 (£3000-£500)
Option 2 costs £100 in additional tax.
Example 3
If Bob (from example 2) had received £3000 income, but incurred £4000 on business expenses (new equipment etc), he still has the same 2 options:
1. Treat £1000 of the income as exempt from Income Tax and pay tax on £2000 (£3000-£1000)
2. Calculate the trading LOSS on his photography business and offset that income against the tax he pays on his income from employment
In this case, Bob would be better off selecting option 2 and should receive a tax refund of £200.