Tax saving tips for the family
Each spouse is taxed separately, so a key element in tax planning is to make the best use of the personal allowance; the starting and basic rate tax band; savings allowance and dividend allowance. You can also think about gifts of assets to distribute income more evenly – always ensuring gifts are outright and unconditional.
In the tax year 2017/18, the personal allowance is £11,500, and the basic rate band is £33,500. With the personal allowance, the threshold at which taxpayers start paying higher rate tax becomes £45,000.
In Scotland, the story is slightly different. Other than for savings and dividend income, the basic rate income tax band for Scottish residents is £31,500. This means that Scottish taxpayers will generally pay higher rate tax if their income other than savings and dividend income exceeds £43,000 or if their total income exceeds £45,000. Additional rate tax is payable on taxable income above £150,000 for all UK residents.
Currently, a transfer of just £1,000 of savings income from a higher rate (40%) tax-paying spouse, who has used their SA in full, to a basic rate spouse with no other savings income may save up to £400 a year.
You can transfer part of the personal allowance between spouses. A marriage allowance of £1,150 for 2017/18 can be transferred between spouses, but only where neither spouse pays tax at above the basic rate.
The blind person’s allowance (£2,320 in 2017/18) can also be transferred between spouses if the recipient doesn’t pay tax or can’t use all the allowance.
Income from assets jointly owned by spouses is usually shared equally for tax purposes. This applies even where the asset is owned in unequal shares, unless you make an election to split the income in proportion to the ownership of the assets. Dividend income from jointly owned shares in ‘close’ companies is an exception, being split according to actual share ownership. Close companies are broadly those owned by the directors or five or fewer people.
Make it a family business
Self employed? Run a family company? Think about employing your spouse or taking them into partnership and thus redistributing income. But make sure such arrangements are commercially justifiable: HMRC may query arrangements that aren’t solidly grounded in reality. And remember that National Minimum Wage/Living Wage rules could come into play. Depending on how a company is structured, there could also be pensions auto-enrolment consequences, too.
To make the arrangement work, ensure:
- wages are actually paid: they’re not just bookkeeping entries
- that your spouse plays an active part in the business
- that wages aren’t unrealistically high.
Child benefit: high income charge
If you get Child Benefit, and either you or your live-in partner (widely defined) have yearly income over £50,000, you may have to pay back some or all the benefit through High Income Child Benefit Charge. It may be possible to reduce your income for Child Benefit purposes in a variety of ways. These include making additional pension contributions or charitable donations, or reviewing how profits are shared and extracted from the family business. Please do contact us for further advice.