Advanced Taxation (UK) · Investment and other expenditure that reduces tax liabilities

Cap on Income Tax Reliefs for ACCA Advanced Taxation (UK)

Updated 11 October 2026 · Fact-checked

The cap on income tax reliefs limits certain reliefs in a tax year to the higher of £50,000 or 25% of income. Total the capped reliefs, find the limit and restrict any excess. A client with a large trade loss may choose not to claim it against general income and carry it forward instead.

Understand Cap on Income Tax Reliefs

Some income tax reliefs let you deduct expenditure from total income with no upper limit. Without a cap, a wealthy person could use large reliefs to wipe out most of their income tax bill. The cap stops that.

The tax tables give the rule: unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income. So a person with low income can still claim up to £50,000. A person with very high income can claim more, up to 25% of their income.

The cap applies only to specified reliefs, which are mainly those that would otherwise be unlimited. The tax tables do not list them, so learn the list from your notes and confirm each relief against it. Examples of capped reliefs are:

trade loss relief against general income, including relief for early-year trade losses
qualifying loan interest relief
relief for losses on unquoted shares against income
certain post-cessation reliefs
property loss relief against general income, where it is available (this is only in limited cases)

This is not a complete list. Check each relief in the scenario against your notes. Do not assume everything is caught.

Many reliefs are outside the cap. Carrying a trade loss forward against future profits of the same trade is not a relief against general income, so the cap does not apply to it. Reliefs with their own limits (such as the pension annual allowance) are dealt with separately.

The 'income' in the 25% test is the individual's adjusted total income for the year. This is total income before the capped reliefs are deducted, adjusted for a small number of technical items (for example, certain pre-trading expenditure). If an adjustment matters, the exam will give you the facts. Show the figure you use.

The skill tested is planning. If a client has big reliefs in one year, you can advise on timing. You can spread claims across years or choose a relief outside the cap. For a trade loss, the client can choose not to claim against general income and instead carry the loss forward against future profits of the same trade. This is an alternative to making the claim. Do not assume that the restricted excess of a claim automatically carries forward. Carry-forward is available for trade losses, not for every capped relief. The goal is to avoid relief being restricted and so wasted.

Key rules to remember

Cap on income tax reliefs: Cap = higher of £50,000 or 25% × income; Taken from the ATX-UK tax tables. Applies 'unless otherwise restricted'.
Restriction: Relief restricted = capped reliefs claimed − cap (if positive); Only the excess over the cap is denied. Relief up to the cap is still given. The excess is unrelieved under that claim. For a trade loss, carrying the loss forward against future profits of the same trade is an alternative to claiming against general income. The restricted excess of a claim does not automatically carry forward.
Relief allowed: Relief allowed = lower of capped reliefs claimed and cap; Reliefs outside the cap are deducted in full and are not part of this test.
Income level at which 25% beats £50,000: 25% × income > £50,000 when income > £200,000; Useful shortcut. Below £200,000 of income the cap is £50,000.

How to solve Cap on Income Tax Reliefs questions

Use the same sequence for any computation or planning question on the cap.

1List every relief claimed against income and mark which are subject to the cap and which are not.
2Total the capped reliefs for the tax year.
3Work out the individual's income for the 25% test: total income before the capped reliefs, adjusted for any technical items the facts give.
4Calculate the cap as the higher of £50,000 and 25% of that income.
5Compare the capped reliefs with the cap. Any excess is restricted.
6Deduct the allowed capped reliefs and the uncapped reliefs in the income tax computation, then compute the tax.
7If asked for advice, suggest ways to avoid a restriction, such as claiming in another year, spreading the expenditure or, for a trade loss, carrying it forward against future profits of the same trade. Note any cash flow or tax rate effect.

Quickest way: Cap check in under a minute

When to use it: Use this when you are short of time and the question just asks whether relief is restricted.

Add up the capped reliefs only.
If they are £50,000 or less, there is no restriction. Stop.
If higher, compute 25% of income. If income is £200,000 or less, the cap stays at £50,000.
Restriction = capped reliefs − cap. State it clearly. Say that the excess is unrelieved under that claim. For a trade loss, add that the client could instead choose not to claim against general income and carry the loss forward against future profits of the same trade.

Common mistakes in Cap on Income Tax Reliefs

Applying the cap to every relief claimed.
Students treat the cap as a general limit on all deductions.
Fix: Identify the reliefs that are capped. Reliefs outside the cap are deducted in full and left out of the test.
Using only £50,000 and forgetting the 25% alternative.
The flat figure is easier to remember.
Fix: Always compute both and take the higher. The 25% figure only wins when income is above £200,000.
Using the wrong income figure for the 25% test.
Students use taxable income after reliefs, or profit rather than total income.
Fix: Use total income before the capped reliefs are deducted, adjusted for any technical items the facts give. Show the figure you used so you earn method marks.
Denying all relief when the cap is exceeded.
Misreading the cap as a cliff edge.
Fix: Only the excess is restricted. Relief up to the cap is still given.
Giving a computation but no planning advice.
Students stop once the number is found.
Fix: Add a short recommendation, such as deferring a claim or carrying a trade loss forward, and link it to the client's objectives.

Worked examples

Example 1

Ravi has total income of £120,000 in 2025/26 before any reliefs. He claims trading loss relief against general income of £70,000. Calculate any restriction.

Show the solution

The loss relief against general income is a capped relief, so capped reliefs are £70,000.
25% of income = 25% × £120,000 = £30,000.
The cap is the higher of £50,000 and £30,000, which is £50,000.
Excess = £70,000 − £50,000 = £20,000.
Relief allowed is £50,000 and £20,000 is restricted.

Answer: The cap is £50,000. Loss relief of £50,000 is allowed against general income and £20,000 is restricted, so it is unrelieved under that claim. The restricted excess does not automatically carry forward. Ravi could instead choose not to claim against general income and carry the loss forward against future profits of the same trade. He should compare the two options.

Example 2

Meera has income of £400,000 in 2025/26 before reliefs. She pays qualifying loan interest and claims other capped reliefs totalling £90,000. Advise whether any relief is restricted.

Show the solution

Capped reliefs are £90,000.
25% × £400,000 = £100,000.
The cap is the higher of £50,000 and £100,000, which is £100,000.
£90,000 is less than £100,000, so there is no excess.
No restriction applies and all £90,000 is deducted.

Answer: The cap is £100,000, which exceeds the £90,000 claimed. No relief is restricted, and she can claim a further £10,000 of capped reliefs before the cap bites.

Exam tips

Quote the rule from the tax tables: higher of £50,000 or 25% of income. Then show the calculation.
Always state which reliefs are capped and which are not. This earns marks even if your figures slip.
In planning questions, give practical options such as carrying a loss forward or claiming in a different year, and mention effects on tax rates.
Show the income figure you used for the 25% test, so the marker can follow your logic.

Practice questions from Investment and other expenditure that reduces 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 Applied SkillsCap on Income Tax Reliefs

Cap on Income Tax Reliefs: frequently asked questions

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

It limits certain otherwise unlimited income tax reliefs to the higher of £50,000 or 25% of income in a tax year. The ACCA tax tables state this, 'unless otherwise restricted'. Any excess over the cap is not relieved under that claim. For a trade loss, the client can choose not to claim against general income and carry the loss forward against future profits of the same trade instead.

Which reliefs are subject to the cap?

Examples are trade loss relief against general income (including early-year losses), qualifying loan interest relief and relief for unquoted share losses. Certain post-cessation reliefs, and property loss relief against general income where it is available, may also be caught. The tax tables do not list the capped reliefs, so confirm the list from your notes. Carrying a trade loss forward against profits of the same trade is outside the cap, as are reliefs with their own separate limits.

When does 25% of income beat the £50,000 limit?

Only when income is above £200,000, because 25% of £200,000 is £50,000. Below that, the cap is £50,000. Above it, the cap is 25% of income.

How can a client avoid the cap restricting relief?

Spread the claims over more than one tax year or choose reliefs that sit outside the cap. For a trade loss, the client can choose not to claim against general income and carry the loss forward against future profits of the same trade instead. Carry-forward is not available for every capped relief. Always consider the tax rates and cash flow effect of each option.