Sometimes, it can certainly feel like you are paying way too much tax. A lot of people feel like this, so you aren’t alone.
Lots of people miss out on valuable deductions and credits each year, just because they are hidden in plain sight.
Understanding the difference between personal tax deductions and individual tax credits is a powerful way to understand your overall tax bill, from mortgage interest to childcare support.
This guide breaks it all down clearly. It’s about helping you keep more of your hard-earned money in your pocket, where it belongs.
Deductions 101: More Than Just Mortgage Interest
Let’s start with deductions. In simple terms, a tax deduction reduces your taxable income. The lower your taxable income, the less tax you’ll pay overall.
Some of the most common personal tax deductions available in the UK are:
- Mortgage Interest Relief (Buy-to-Let only): Since April 2020, landlords can no longer deduct mortgage interest from rental income. Instead, they now receive a 20% tax credit on finance costs like mortgage interest. While it’s no longer a direct deduction, this relief still helps lower your tax bill and should not be overlooked.
- Student Loan Repayments: While not a traditional tax deduction, UK student loan repayments are income-contingent. They reduce your take-home pay, so understanding your repayment plan threshold (e.g., Plan 2 begins at £27,295) is important when budgeting for your net income and overall tax exposure.
- Medical Expenses (in limited cases): Most healthcare costs are covered by the NHS, but certain private treatments, especially through salary sacrifice schemes, may lower your taxable income if structured correctly. This isn’t universally available, but it is worth exploring through your employer.
- Pension Contributions: Contributions to personal or workplace pensions are tax-deductible within limits. For 2025–26, the annual allowance is £60,000. However, if your adjusted income exceeds £260,000, a tapered annual allowance may apply. Also, the new full State Pension for 2025–26 is £230.25 per week.
But do not forget! Keeping accurate records, such as payslips, receipts, and pension statements, is totally essential should you need to justify these deductions to HMRC.
Credits with a Real Impact
Unlike deductions, which reduce the amount of income you’re taxed on, tax credits directly reduce the amount of tax you owe. They’re especially valuable because they apply pound for pound against your liability.
Here are a few of the main individual tax credits available:
- Child Tax Credit (Legacy System): This credit only applies to existing claimants. New applications are processed through Universal Credit. If you’re still on the legacy system, this credit could be worth thousands, depending on your income and family size.
- Marriage Allowance: If one partner earns below the Personal Allowance of £12,570 and the other is a basic-rate taxpayer, you can transfer up to £1,260 of the allowance. This could save up to £252 in tax per year. Claims can be backdated for up to four tax years, so it’s worth checking past eligibility.
- Education-Related Relief: While the UK doesn’t offer a standard “tuition credit,” you may be eligible for relief if you pay for professional development or training required by your employer, especially through tax-deductible expense claims or employer-sponsored schemes.
- Blind Person’s Allowance: A lesser-known tax credit, for 2025–26, this allows those registered blind to claim an extra £3,130 tax-free on top of their Personal Allowance.
Making the Most of Other Allowances
Some credits are refundable, meaning you can still receive the value even if you owe no tax.
While deductions and credits are essential tools for reducing your tax bill, there are other allowances that can make a big difference, especially for those with investments or additional sources of income.
- Dividend Allowance: For 2025–26, the Dividend Allowance is just £500 (down from £1,000 in 2023–24). The first £500 of dividend income is tax-free, and any above that is taxed based on your income bracket.
- Capital Gains Tax (CGT) Exemption: The CGT annual exemption is now just £3,000 per individual. If you sell shares or a second property and make a gain above this, you’ll pay CGT at 10%, 18%, 20%, or 24%, depending on the asset and your income band.
- ISA Allowance: The ISA allowance remains at £20,000 for 2025–26. Interest, dividends, and capital gains from ISAs are completely tax-free, making them a top choice for tax-efficient savings and investment.
If you invest outside of tax-free accounts like ISAs or pensions, these allowances are crucial to understand and monitor.
Mistakes to Avoid
Even the most organised taxpayer can miss out if they don’t know what to watch for.
Many people don’t claim when they’re actually eligible and miss out on things like Marriage Allowance and pension tax relief. Make sure to check, so you don’t miss these opportunities. It’s also important to check deadlines, as some of these credits or reliefs need to be claimed before the end of the tax year (5 April). Others sometimes allow backdating, but only for a limited time.
You should be keeping to hand any documents that are evidence of deductions, like charitable donations or pension contributions, just in case HMRC asks for them. It’s better to save the stress and have these documents in an easy place.
Lastly, tax rules can change quite a lot, so make sure you aren’t relying on outdated info. The mortgage interest deduction for landlords was phased out and replaced with a tax credit. This is an example of a change that may go unnoticed; it’s something many still misunderstand.
How Informed Financial Planning Can Help
Understanding which tax deductions and credits apply to you isn’t always straightforward, but it is a crucial aspect of tax planning. Rules change, and opportunities are often missed simply because no one points them out.
At Informed Financial Planning, we help individuals take control of their finances by identifying tax-saving opportunities that fit their personal situation. Whether you’re employed, self-employed, or somewhere in between, we’re here to support you.
Our advisers can help you:
- Review your current tax position and highlight potential savings
- Maximise allowances and reliefs you’re entitled to
- Plan pension contributions or charitable giving in a tax-efficient way
- Ensure you’re well-prepared ahead of key tax year deadlines
Making sense of tax shouldn’t be a guessing game. With the right guidance, you can reduce your tax bill, stay compliant, and feel more confident about your financial future.
If you need a hand wrapping your head around it all, please feel free to contact us.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
Taxation and legislation may change in future and rules may vary depending on personal circumstances.