Making the Most of Independent Taxation

May 2017
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As we prepare to vote in the General Election it is worth reflecting that next year marks the centenary of universal suffrage in the U.K. 100 years ago a significant section of the population had no say in who formed our Government let alone being eligible to become an MP or even PM.

Even more surprising is that despite married women being given rights over their own property as far back as 1882, they only won the right to independent taxation from their husbands in 1990. Until that time a married man was responsible for the payment of tax on all his wife's income and gains. So for most of the time Mrs Thatcher was running the country, Dennis had to pick up the tax bill on her investments and savings.

Now husbands and wives each have their own allowances for income tax, capital gains and inheritance tax and can make completely independent decisions about how they manage their finances and arrange their tax affairs.

While some couples choose to keep their finances separate, there are benefits in collaborating when it comes to minimising tax liabilities and maximising the net retained income and gains from savings and investments. This is particularly the case where each spouse or civil partner has different levels of earned income or capital gains and therefore pays tax at potentially different rates.

Here are just a few ways married couples and civil partners can make the most of their allowances.

Transferable Income Tax Allowance

For 2017/18 the personal tax allowance is £11,500 for all with taxable income below £100,000. If one of you has earned and investment income below £11,500 and the other has income below £45,000 up to 10% of the non taxpayers allowance can be transferred to the taxpayer. This saves up to £230 of income tax as up to £1,150 of income will cease to be taxed at 20%. Couples can apply on line to transfer part of their income tax allowance. www.gov.uk/apply-marriage-allowance.

Savings Income Allowance

Each also has a tax free allowance for savings interest. For nil and basic rate taxpayers this is £1,000 and for those with earnings between £45,000 and £150,000 it is £500. Top rate taxpayers do not get this allowance.

Interest on savings, not in an ISA, is taxable and is paid without deduction of tax by your bank or building society. Savings are taxed in the hands of the owner and joint accounts are taxed on a 50/50 basis. Taxable interest has to be paid via the self assessment tax return.

Where taxable savings interest is more than these allowances, ownership of the accounts may need to be switched from one spouse to another to ensure that both allowances are fully used before one of you pays tax.

£100,000 or More Income

If one of you has total income in excess of £100,000 the personal allowance is reduced by £1 for every £2 over this threshold until at £123,000 there is no personal allowance. Income in this band is taxed at an effective rate of 60%.

If the income in excess of £100,000 is investment income, rather than earned income, it could be beneficial to transfer the asset producing it to a lower tax paying spouse or civil partner.

It may be beneficial to consider contributing to a personal pension as this would reduce the taxable income towards or below the £100,000 level and take advantage of effective tax relief rate of up to 60%. 

Dividends Tax Allowance

Each taxpayer has a tax free allowance of £5,000 for dividends from shares, likely to reduce to £2,000 from next year. Once this allowance is exceeded, tax is paid on the excess at 7.5% for those with incomes up to £45,000 and 32.5% for higher rate taxpayers, and 38.1% for top rate taxpayers. Dividends are taxed according to ownership. Ensuring that shares are owned by the lower rate taxpayer will reduce the overall bill.

When changing ownership of shares or property, capital gains need to be taken into account too. If the shares qualify for Entrepreneurs relief, both taxes need to be taken into account first and professional advice should be sought.

Kay Ingram
Director of Public Policy, LEBC

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. The Financial Conduct Authority does not regulate tax planning. Tax rates and allowances may change in future.

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