Taxation (UK) · The use of exemptions and reliefs in deferring and minimising income tax liabilities

Cap on Income Tax Reliefs in ACCA TX-UK

Updated 11 October 2026 · Fact-checked

The cap limits certain otherwise unlimited income tax reliefs, such as trading loss relief against general income and qualifying loan interest. Total relief in a year cannot exceed the higher of £50,000 or 25% of adjusted total income. Add up the capped reliefs claimed, deduct the lower of that total and the cap, and carry forward any unrelieved trading loss.

Understand Cap on Income Tax Reliefs

Some reliefs let you deduct amounts from total income before tax is worked out. Without a limit, a person with large income could wipe out their tax bill with a big loss or big interest payment. The cap stops this.

The cap applies to specific reliefs that are otherwise unlimited. In TX-UK these are mainly trading loss relief against general income, qualifying loan interest and share loss relief against income (losses on unquoted trading company shares).

Pension contributions are outside the cap because they have their own annual allowance. Gift Aid is outside it too. Gift Aid extends the basic rate band, so it is not a deduction from income at all.

The ACCA tax tables say: unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income. The income used is adjusted total income. This is total income before the capped reliefs are deducted, less gross personal pension contributions. In simple questions with no pension contributions, adjusted total income is just total income before the reliefs. In exam questions, you are normally given the figure to use or can work it out from the income listed.

Because it is the higher of two amounts, the 25% test only matters once adjusted total income is above £200,000. Below that, 25% of it is less than £50,000, so the cap is £50,000.

The cap only bites on relief against general income. A trading loss carried forward against future profits of the same trade is not set against general income, so it is not restricted. This is why an unrelieved trading loss is carried forward rather than lost.

Key rules to remember

Cap on reliefs: Cap = higher of £50,000 and 25% × adjusted total income; Adjusted total income is total income before the capped reliefs, less gross personal pension contributions. With no pension contributions it equals total income before the reliefs. This is the ACCA tax table rule.
Break-even income: 25% × adjusted total income > £50,000 when adjusted total income > £200,000; At or below £200,000 of adjusted total income, the cap is £50,000.
Relief allowed: Relief allowed = lower of (total capped reliefs claimed, cap); Add the capped reliefs together first. The cap is one limit for all of them, not one per relief. The taxpayer chooses how to use the cap between the reliefs.
Net income: Net income = total income − relief allowed; Deduct the allowed relief before the personal allowance.

How to solve Cap on Income Tax Reliefs questions

Use this method for any question that gives large reliefs or a big loss against a person's income.

1List total income for the year, before any of the capped reliefs. If there are gross personal pension contributions, deduct them to get adjusted total income.
2Identify which reliefs are capped: trading loss against general income, qualifying loan interest, share loss relief against income. Set aside Gift Aid (it extends the basic rate band) and pension contributions (they have their own annual allowance).
3Add up the capped reliefs the person wants to claim.
4Calculate the cap: compare £50,000 with 25% of adjusted total income and take the higher.
5Allow relief equal to the lower of the claimed total and the cap.
6Deduct the allowed relief from total income to give net income, then continue with the personal allowance and tax.
7State what happens to the excess. The taxpayer chooses how to allocate the cap between the reliefs. An unrelieved trading loss can be carried forward against future profits of the same trade. Unrelieved qualifying interest is not carried forward.

Quickest way: Two-number cap check

When to use it: Use it when a question mentions a large loss or interest and asks for the maximum relief or net income.

Quote 25% of income. If it is under £50,000, write the cap as £50,000 straight away.
Write the total of capped reliefs claimed.
Relief = the smaller of those two numbers.
Excess loss = claimed − relief; carry it forward.

Common mistakes in Cap on Income Tax Reliefs

Applying 25% of income as the cap when it is less than £50,000.
Students remember the 25% and forget the cap is the higher of two amounts.
Fix: Always compute both and take the higher. Below £200,000 of adjusted total income the cap is £50,000.
Applying the cap to Gift Aid or pension contributions.
They are all reliefs, so they seem to belong together.
Fix: The cap covers reliefs such as sideways loss relief and loan interest. Gift Aid extends the basic rate band, so it is not a deduction from income. Pension relief has its own annual allowance.
Applying a separate cap to each relief.
Students treat each relief as a separate claim.
Fix: There is one cap for the year. Add the capped reliefs together before testing. The taxpayer chooses how the cap is used between them.
Using income after deducting the reliefs to work out 25%.
Students take net income from a part-finished computation.
Fix: Use adjusted total income: income before the capped reliefs, less gross personal pension contributions.
Forgetting to carry forward the unrelieved trading loss.
The question ends once net income is found.
Fix: State the carry forward against future profits of the same trade. Show the amount.
Applying the cap to loss relief carried forward against the same trade.
Students think any loss relief is capped.
Fix: The cap concerns relief against general income. Carry-forward set against trade profits is not restricted by it.

Worked examples

Example 1

In 2025/26 Priya has employment income of £90,000. Her sole trade made a loss of £70,000, and she claims to set it against her general income. She makes no pension contributions. Calculate her net income and any loss carried forward.

Show the solution

Total income before the relief is £90,000. With no pension contributions, adjusted total income is also £90,000.
25% × £90,000 = £22,500, which is less than £50,000.
The cap is therefore the higher figure, £50,000.
Claimed relief is £70,000, which is more than the cap, so relief allowed is £50,000.
Net income = £90,000 − £50,000 = £40,000.
Unrelieved loss = £70,000 − £50,000 = £20,000, carried forward against future profits of the same trade.

Answer: Net income is £40,000 (before the personal allowance). £20,000 of loss is carried forward.

Example 2

Tom has property income of £300,000 in a year and makes no pension contributions. He paid qualifying loan interest of £40,000 and has a trading loss of £90,000 that he wants to set against general income. Calculate the maximum relief, his net income and the loss carried forward if he chooses to claim the interest in full.

Show the solution

Total income before the reliefs is £300,000. With no pension contributions, adjusted total income is also £300,000.
25% × £300,000 = £75,000, which is more than £50,000, so the cap is £75,000.
Total reliefs wanted are £40,000 + £90,000 = £130,000, which exceeds the cap.
Maximum relief allowed is £75,000.
Tom chooses to claim the interest of £40,000 in full, leaving £75,000 − £40,000 = £35,000 for the loss.
Net income = £300,000 − £75,000 = £225,000.
Unrelieved loss = £90,000 − £35,000 = £55,000, carried forward against future profits of the same trade.

Answer: Maximum relief is £75,000. Net income is £225,000 (before the personal allowance). £55,000 of loss is carried forward.

Exam tips

Write the cap calculation as a separate line in your answer. Marks are often given for the £50,000 and 25% comparison.
Check the income level first. If adjusted total income is under £200,000, you can state the cap as £50,000 without a long working.
In a Section C answer, list which reliefs are capped. Say that Gift Aid extends the basic rate band, so it is not a deduction from income, and that pension relief is outside the cap because it has its own annual allowance.
In objective questions, look for the trap of a loss carried forward being treated as capped, or of using net income instead of adjusted total income.
Always show the unrelieved loss and where it goes, even if the question only asks for net income.

Practice questions from The use of exemptions and reliefs in deferring and minimising income tax liabilities

Cap on Income Tax Reliefs in other exams

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

ACCA Strategic ProfessionalCap on Income Tax Reliefs

Cap on Income Tax Reliefs: frequently asked questions

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

It is the higher of £50,000 or 25% of adjusted total income. Adjusted total income is total income before the capped reliefs, less gross personal pension contributions. The cap limits the total of certain otherwise uncapped reliefs you can deduct from income in one year.

Which reliefs are subject to the cap?

The main ones are trading loss relief against general income, qualifying loan interest and share loss relief against income. Pension contributions are outside the cap because they have their own annual allowance. Gift Aid is outside it because it extends the basic rate band rather than reducing income.

When does the 25% of income test matter?

Only when adjusted total income is over £200,000, because that is when 25% of it exceeds £50,000. Below that level, the cap is £50,000.

What happens to a trading loss that the cap blocks?

The taxpayer chooses how to allocate the cap between the reliefs claimed. The unrelieved part of the trading loss can be carried forward and set against future profits of the same trade. Excess qualifying interest is not carried forward.