Tax planning is not only for the very wealthy, there are simple things most UK resident taxpayers can do to save tax they pay. With potential tax rises in the Spring Budget, now is the time to make some tax related New Year resolutions.
Independent taxation of spouses and civil partners
Reviewing ownership of assets within the family can result in a lower tax bill. Married couples and civil partners may benefit from switching ownership of assets which produce investment income and gains, where one is paying a lower tax rate than the other, or where two allowances may double the amount which can be claimed tax free. Cohabiting couples have less scope, as gifts between them can give rise to inheritance or capital gains tax, so more care is needed.
The key income tax thresholds for England, Wales and Northern Ireland are: -
|Taxable Income||Rate of tax payable|
|Up to £12,500, if income below £100,000||0% personal allowance|
|Up to £5,000 savings income||0% savings income allowance|
|£12,501- £50,000||20% basic rate|
|£50,001- £150,000||40% higher rate|
|£150,001+||45% top rate|
|£100,000-£125,000||60% restricted personal allowance|
Scots resident taxpayers have an allowance of £12,500 but pay 41% on income over £43,430 and 46% over £150,000 with three lower tiers of 19%,20% and 21%.
Nil and basic rate taxpayers have a savings income allowance of £1,000, reduced to £500 for higher rate taxpayers and nil for top rate taxpayers. Each taxpayer can also earn up to £2,000 of dividends with no tax due.
Switching ownership to a lower taxpayer may result in less tax being payable and open eligibility for other allowances. In a year when many have seen a change in their income, new opportunities may be available. For example, a higher rate taxpayer transferring an interest-bearing account to a basic rate taxpayer could receive £500 more interest tax free, saving £200 and a top rate taxpayer could save up to £450. With savings income an additional £5,000 can be earned tax free, so long as other taxable income does not exceed £12,500. Where other taxable income is between £12,500 and £17,500 the £5,000 tax free allowance is granted pro rata.
Married couples and civil partners, where one is a non-taxpayer and the other a basic rate payer, may claim marriage allowance, this involves transferring 10% of the personal allowance of the non- taxpayer to the basic rate payer means an extra £1, 250 of their income is taxed at 0%, saving £250 per year. Where eligible this can be backdated for 4 years, worth up to £1,118. Couples over age 85 may be better off claiming the Married Couples Allowance which can be worth up to £907.50 reduction in tax.
Avoiding the Cliff Edges
Where an individual’s taxable income exceeds a threshold, other allowances and benefits are withdrawn, but there are ways to restore them.
This includes eligibility for tax free child benefit and tax-free childcare accounts. Parents of children under 16 (19 if in education) are eligible for tax free child benefit. But if income of one adult exceeds £50,099 it is gradually taxed, so that once income is over £60,000 it is taxed at 100%.
Similarly, parents with one income over £100,000 are ineligible for Tax Free Childcare Accounts, losing a subsidy of up to £2,000 per child per year towards childcare costs for under 12s.
Once income reaches £100,000 the personal allowance of £12,500 is reduced by £1 for every £2 of income over, so once over £125,000 all income is taxed. This creates an effective rate of tax of 60% on this slice of income. If some of the excess is made up of investment income, then transferring the investment to a spouse or civil partner who will then be taxed on it, may restore some of the allowance.
Pension Savings and Gift Aid
Where the income is earned or from self -employed profits or a pension, it cannot be transferred to another taxpayer. But the taxable income can be reduced by making pension savings or gift aid donations. The amount of these are deducted from taxable income, not only reducing the tax otherwise payable at the marginal rate but reducing the income below the threshold at which other allowances are withdrawn. Saving for retirement or supporting good causes offers additional benefits to the taxpayer.
We are here to help guide you through the tax savings available, for personal advice please contact your usual LEBC adviser or email firstname.lastname@example.org Telephone 0800 055 6585.
Public Policy Director
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. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.Back to News & Views