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Taxation (UK) · The comprehensive computation of taxable income and income tax liability

Cap on Income Tax Reliefs and Loss Relief Deductions

Updated 11 October 2026 · Fact-checked

Qualifying loan interest and trading losses set against general income are deducted from total income to give net income. Certain reliefs are capped at the higher of £50,000 or 25% of income. Compute the cap first, restrict the reliefs if needed, then deduct the personal allowance.

Understand Cap on Income Tax Reliefs and Loss Relief Deductions

Income tax is worked out on a standard layout. You list all income, add it up to total income, then deduct reliefs to reach net income. Only after that do you deduct the personal allowance to reach taxable income. Reliefs come before the allowance. This order matters.

Two reliefs you must know here are qualifying loan interest and trading loss relief against general income. Qualifying interest is interest on a loan used for a qualifying purpose, such as buying into a partnership. You deduct the interest paid in the tax year from total income. A trading loss can be set against total income of the same tax year, the previous tax year, or both. You claim it, and it is deducted from total income like any other relief.

These reliefs used to be unlimited. That allowed wealthy people to wipe out their tax bill. The cap now limits them. ACCA gives the rule in its tax tables: unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income. So a person with income of £200,000 has a cap of £50,000 (25% is £50,000 too). A person with income of £300,000 has a cap of £75,000.

The cap only bites on the reliefs that are otherwise unlimited, such as loss relief against general income and qualifying loan interest. It does not apply to everything. Pension contributions and Gift Aid have their own rules and are not part of this cap. Relief for a trading loss set only against profits of the same trade is also outside it.

If the cap restricts a trading loss, the unrelieved part is not lost. You can normally carry it forward against future profits of the same trade. Excess interest is not carried forward, so watch what you claim. The exam normally tells you which claim is being made.

Key rules to remember

Tax layout order
Total income − reliefs (qualifying interest, loss relief) = Net income; Net income − personal allowance = Taxable income
Reliefs are deducted before the personal allowance.
Cap on income tax reliefs
Cap = higher of £50,000 or 25% × income
Applies unless the relief is otherwise restricted. Use income before the reliefs being capped.
Restricted relief
Relief given = lower of (reliefs claimed that are subject to the cap) and the cap
Compare the total of capped reliefs with the cap, not each relief on its own.
Personal allowance
£12,570, reduced by £1 for every £2 of adjusted net income over £100,000; nil at £125,140 or more
Net income after reliefs drives the reduction, so a loss claim can protect the allowance.
Unrelieved trading loss
Loss carried forward = loss − loss relief used
Carried forward against future profits of the same trade.

How to solve Cap on Income Tax Reliefs and Loss Relief Deductions questions

Use this method for any question that asks you to deduct interest or losses and apply the cap.

  1. 1List all income for the tax year and add it up to total income, keeping non-savings, savings and dividend income separate.
  2. 2Identify the reliefs claimed: qualifying loan interest paid and any trading loss set against general income.
  3. 3Work out the cap: the higher of £50,000 or 25% of income. Use the income before these reliefs.
  4. 4Add up the reliefs that are subject to the cap and compare the total with the cap. Deduct the lower figure.
  5. 5Deduct the relief from income to get net income, taking non-savings income first, then savings, then dividends.
  6. 6Deduct the personal allowance. Check whether net income is over £100,000 and reduce the allowance if so.
  7. 7Calculate the tax on taxable income using the bands and rates in the tax tables.
  8. 8State any trading loss not relieved and where it goes, usually carried forward against the same trade.

Quickest way: Cap check in 20 seconds

When to use it: Use it in objective test questions and as a first check in a long computation.

  1. Write 25% of income and compare it with £50,000. Take the bigger figure as the cap.
  2. If income is £200,000 or less, the cap is £50,000.
  3. Add the capped reliefs. If they are under the cap, deduct them in full and move on.
  4. If they are over the cap, deduct only the cap and note the loss excess carried forward.
  5. Check net income against £100,000 and £125,140 for the personal allowance.

Common mistakes in Cap on Income Tax Reliefs and Loss Relief Deductions

  • Always using £50,000 as the cap.

    Students remember the fixed figure and forget the 25% alternative.

    Fix: Always compute 25% of income too and take the higher. It only matters when income is over £200,000.

  • Deducting the personal allowance before the reliefs.

    The allowance feels like the first deduction.

    Fix: Follow the layout: total income, reliefs, net income, then personal allowance.

  • Applying the cap to every relief, such as Gift Aid or pension contributions.

    The word relief suggests all of them are covered.

    Fix: The cap covers the otherwise unlimited reliefs, like loss relief against general income and qualifying interest. Treat pensions and Gift Aid under their own rules.

  • Forgetting to carry forward the loss that the cap blocks.

    Students stop once the deduction is limited.

    Fix: Work out loss minus loss relief given and state it is carried forward against future profits of the same trade.

  • Capping each relief separately.

    Students apply the cap to the loss and again to the interest.

    Fix: Add the capped reliefs together and apply one cap to the total.

  • Wasting the personal allowance when claiming a loss against general income.

    The loss wipes out income that the allowance would have covered.

    Fix: After the relief, check how much income is left. If it is below the allowance, part of the allowance is lost. Say so and consider whether a different claim is better.

Worked examples

Example 1

In 2025/26 Sam has employment income of £160,000 and a trading loss of £70,000. He claims loss relief against general income for 2025/26. Calculate his taxable income.

Show the solution
  1. Total income is £160,000, the employment income.
  2. The cap is the higher of £50,000 and 25% × £160,000 = £40,000. So the cap is £50,000.
  3. The loss claimed is £70,000, which is more than the cap, so relief is limited to £50,000.
  4. Net income = £160,000 − £50,000 = £110,000.
  5. Net income is over £100,000. Excess = £10,000. Allowance reduction = £10,000 ÷ 2 = £5,000.
  6. Personal allowance = £12,570 − £5,000 = £7,570.
  7. Taxable income = £110,000 − £7,570 = £102,430.
  8. Unrelieved loss = £70,000 − £50,000 = £20,000, carried forward against future profits of the same trade.

Answer: Taxable income is £102,430. £20,000 of the loss is carried forward.

Example 2

In 2025/26 Priya has employment income of £52,000 and property income of £8,000. She paid £4,000 of qualifying loan interest and has a trading loss of £20,000 that she sets against general income. Calculate her taxable income and the income tax at the basic rate of 20%.

Show the solution
  1. Total income = £52,000 + £8,000 = £60,000.
  2. The cap is the higher of £50,000 and 25% × £60,000 = £15,000. So the cap is £50,000.
  3. Reliefs subject to the cap = £4,000 + £20,000 = £24,000, which is below £50,000, so they are given in full.
  4. Net income = £60,000 − £24,000 = £36,000.
  5. Net income is below £100,000, so the personal allowance is £12,570.
  6. Taxable income = £36,000 − £12,570 = £23,430.
  7. This is within the £37,700 basic rate band, so tax = £23,430 × 20% = £4,686.

Answer: Taxable income is £23,430 and income tax is £4,686.

Exam tips

  • Show the cap workings even when the cap does not bite. Method marks are given for the comparison.
  • Keep the layout in order: total income, reliefs, net income, personal allowance. Examiners mark each line.
  • In objective test questions, check whether income is over £200,000. If it is not, the cap is £50,000.
  • State the carry forward of unrelieved losses in constructed response answers. It is an easy mark.
  • When income is near £100,000, check the personal allowance reduction after the relief.

Practice questions from The comprehensive computation of taxable income and income tax liability

Cap on Income Tax Reliefs and Loss Relief Deductions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cap on Income Tax Reliefs and Loss Relief Deductions: frequently asked questions

What is the cap on income tax reliefs for ACCA TX-UK?

Unless otherwise restricted, certain reliefs are capped at the higher of £50,000 or 25% of income. This is in the tax rates and allowances ACCA provides. You must work out both figures and use the higher.

Which reliefs does the cap apply to?

It applies to the otherwise unlimited reliefs, such as trading loss relief against general income and qualifying loan interest. It does not apply to every relief. Pension contributions and Gift Aid follow their own rules.

Can I set a trading loss against other income?

Yes. You can claim to set a trading loss against total income of the same tax year, the previous tax year, or both. The relief is deducted from total income before the personal allowance and is subject to the cap.

What happens to a loss the cap does not allow?

The unrelieved part is normally carried forward and set against future profits of the same trade. Show this in your answer. Qualifying interest that is not relieved is not carried forward.