Advanced Taxation (UK) · Income tax: the comprehensive computation of taxable income and the income tax liability

Cap on Income Tax Reliefs in ATX-UK

Updated 11 October 2026 · Fact-checked

The cap on income tax reliefs limits certain reliefs deducted from general income, such as trading loss relief against general income, to the higher of £50,000 or 25% of income. The excess is not relieved against this year's general income, so you advise on other options for it. You apply the cap in the income tax computation.

Understand Cap on Income Tax Reliefs

Some reliefs let you deduct a loss or payment from your total income, which can wipe out the tax bill. Without a limit, a wealthy person could use large reliefs to pay little or no income tax. The cap stops this.

The tax tables ACCA gives you say: "Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income." So you work out a cap figure, compare your capped reliefs to it, and restrict any excess.

The cap applies to certain reliefs that are deducted from total income. In ATX the main one is trading loss relief against general income. Examples are early trade losses (losses in the first four years of a trade) and general loss relief against income of the year or the prior year. The tax tables do not list the reliefs, so rely on the requirement and the scenario to see which are in point.

The cap does not apply to every relief. Reliefs that have their own separate limit, such as pension contributions (limited by the annual allowance) and charitable giving, are outside it. Terminal loss relief is not a relief against general income, so it is not part of this test. If a question names a relief you cannot place, state your assumption.

The tax tables simply say "income" for the 25% limb. Use the income figure the question gives you or asks you to use, and label it clearly, for example as adjusted total income. Normally this is your income for the year before the capped relief is deducted. It is not income after the loss has been deducted. Show your working.

Key rules to remember

Cap on income tax reliefs: Cap = higher of £50,000 and 25% × adjusted total income; The tax tables give: "Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income." 25% only wins if adjusted total income exceeds £200,000.
Breakeven income: 25% × income > £50,000 when income > £200,000; Below £200,000 of adjusted total income, the cap is simply £50,000.
Relief allowed: Relief allowed = lower of (capped reliefs claimed) and (cap); The restricted excess is not deducted against general income this year. Do not assume it is carried forward automatically. Consider other options, such as relief against chargeable gains, carry-back or carry-forward where available, or withdrawing the claim and carrying the loss forward against future profits of the same trade.

How to solve Cap on Income Tax Reliefs questions

Use this method whenever a question gives a loss or other relief to set against general income for an individual with substantial income.

1List all income for the year (trading, property, savings, dividends, employment) before any relief, and note which relief is claimed against general income.
2Decide whether each relief is within the cap. Trading loss relief against general income is the key one in ATX.
3Identify the income figure for the cap test. Use the figure the question gives, which is normally income before the capped relief is deducted. Test 25% of it against £50,000.
4Set the cap at the higher of £50,000 and 25% of that income figure.
5Compare the capped reliefs to the cap and restrict any excess. Deduct only the allowed amount from total income.
6Continue the income tax computation: personal allowance, bands, dividend and savings rates. Check whether adjusted net income exceeds £100,000, because the personal allowance is then reduced.
7State that the restricted excess is not relieved against general income this year. Then consider other options: relief against chargeable gains, carry-back or carry-forward where available, or withdrawing the claim and carrying the loss forward against future profits of the same trade.

Quickest way: Quick check of the cap

When to use it: Use when you need the answer fast and income is clearly below or well above £200,000.

If adjusted total income is below £200,000, the cap is £50,000. Do not calculate 25%.
If income is well above £200,000, calculate 25% and compare. Take the higher figure.
Allow the lower of the relief claimed and the cap. Show the excess clearly.
Write one line saying where the excess goes, such as a carry-forward option.

Common mistakes in Cap on Income Tax Reliefs

Using £50,000 only and ignoring the 25% limb.
Students remember the round number and forget the alternative.
Fix: Always write the test: higher of £50,000 and 25% of income. Check whether income exceeds £200,000.
Applying the cap to every relief.
The word 'cap' sounds general.
Fix: Apply it to the relevant uncapped reliefs, mainly trading loss relief against general income. Reliefs with their own limits follow their own rules.
Using the wrong income figure for the 25% test.
Students take total income after the loss has already reduced it.
Fix: Use the income figure the question gives, normally income before the capped relief is deducted. Show your working.
Losing the restricted amount with no comment, or assuming it is carried forward automatically.
Students stop once the relief is capped, or assume the excess always carries forward.
Fix: Say that the excess is not relieved against general income this year. Mention other options: relief against chargeable gains, carry-back where available, or withdrawing the claim and carrying the loss forward against later profits of the same trade.
Forgetting the knock-on effect on the personal allowance.
The cap is treated as a separate step.
Fix: Restricting relief raises adjusted net income. Where adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for each £2 above the limit, to nil at £125,140. Redo the allowance after the cap.

Worked examples

Example 1

Priya has total income of £300,000 before reliefs and a £90,000 trading loss from a second trade, which she claims against general income. She makes no personal pension contributions, so adjusted total income is £300,000. How much loss relief can she use against general income?

Show the solution

The loss relief against general income is within the cap.
25% of £300,000 = £75,000.
Compare: higher of £50,000 and £75,000 = £75,000 cap.
Relief claimed £90,000 exceeds the cap of £75,000.
Relief allowed = £75,000. Excess = £90,000 − £75,000 = £15,000.

Answer: Priya can deduct £75,000 against general income. The £15,000 excess is not relieved against general income this year. She should consider other options: relief against chargeable gains, carry-back or carry-forward where available, or withdrawing the claim and carrying the loss forward against future profits of that trade.

Example 2

Tom has total income of £120,000 before reliefs and a trading loss of £60,000, which he claims against general income. Assume adjusted total income for the cap is £120,000. Find his relief allowed and net income.

Show the solution

25% × £120,000 = £30,000.
Cap = higher of £50,000 and £30,000 = £50,000.
Loss claimed £60,000 exceeds £50,000.
Relief allowed = £50,000. Excess = £10,000.
Net income = £120,000 − £50,000 = £70,000.

Answer: Relief allowed is £50,000 and net income is £70,000. The £10,000 excess is not relieved against general income this year. Tom should consider other options, such as relief against chargeable gains, carry-back or carry-forward where available, or withdrawing the claim and carrying the loss forward against future profits of the same trade.

Exam tips

Write the cap test in full on every question: higher of £50,000 or 25% of income. It is in the tax tables, so quote it.
Read the requirement for which relief is claimed. Only apply the cap to the relevant relief.
Always comment on the excess. Examiners reward the advice on what to do with it.
Recompute the personal allowance after the cap, because adjusted net income changes.
Show every working. Calculations are to the nearest £.

Practice questions from Income tax: the comprehensive computation of taxable income and the income tax liability

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 Applied SkillsCap on Income Tax Reliefs

Cap on Income Tax Reliefs: frequently asked questions

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

Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income. It is shown in the tax tables in the exam. You compare the relief claimed with this cap and allow only the lower amount.

When does the 25% limb apply instead of £50,000?

It applies when 25% of the income figure is more than £50,000. That happens when income is above £200,000. Below that, the cap is £50,000.

Does the cap apply to trading loss relief against general income?

Yes, this is the main relief you will meet. Where the loss claimed against general income exceeds the cap, the excess cannot be deducted from general income this year. Consider other options for the unused loss.

Do pension contributions count towards the cap?

Pension relief is limited by its own rules, such as the annual allowance, so it is dealt with separately. Do not mix it into the cap test unless the question directs you to.