Although we are some way off the end of the tax year, it is worth reviewing one’s financial affairs on an ongoing basis to ensure tax liabilities are mitigated.
This is particularly the case for married couples as each spouse has their own Personal Allowance entitlement, which for the current tax year is £11,000, and basic rate tax band of £32,000.
In total, up to £86,000 of combined income could potentially be sheltered from higher-rate tax.
As it is possible to transfer assets between spouses free of all taxes, it would be tax-efficient for the spouse with the higher income to transfer income producing assets to the spouse with the lower income to ensure that spouse’s Personal Allowance is used whilst at the same time mitigate any higher-rate tax liability of the transferring spouse.
Such assets transfers would also be beneficial for families concerned about the taxation of child benefit which arises where one spouse has income of £50,000 or more. The child benefit tax applies at a rate of 1% of the award for each £100 of income that exceeds £50,000. The whole benefit is clawed back where income exceeds £60,000.
Inter-spouse transfer of income producing assets could result in income falling below the £50,000 threshold ensuring that the full award is retained.
Where it is not possible to transfer such assets, it may be worth considering paying a pre-April 6, 2017, pension contribution to reduce income below the £50,000 threshold, thus ensuring the benefit is received in full as well as gaining higher-rate tax relief on the contribution paid.
Someone on, say, £55,000, claiming child benefit for two children, who makes a pension payment of £4,000 (£5,000 grossed up for basic rate tax relief given at source) saves £894 in otherwise lost child benefit together with higher rate tax of £1,000 on the pension contribution, that is an effective rate of tax of 47.35% of the net payment.
Gift Aid donations can also be useful in reducing the impact of any child benefit tax and, where these are paid by both spouses, it would be sensible for the charity donations to be made by the spouse with the higher income to obtain the optimum relief for these payments.
For couples not liable to higher rate tax it may still be possible for them to reduce their overall tax liability, where one spouse does not fully utilise their Personal Allowance.
Since April 6, 2015, married couples can claim to transfer 10% of their Personal Allowance to the other spouse. This “Marriage Allowance” could make a couple £220 better off for 2016/17, while a claim for the previous year could give rise to a tax saving of up to £212.
The main beneficiaries of the allowance are couples with young children, where one spouse either does not work or earns an amount below the Personal Allowance, or older couples with modest pension income.
A claim for the Marriage Allowance can be made at www.gov.uk/marriage-allowance .
