With another tax year coming to a close in a few months' time, it’s a good time to look at end of year tax planning ideas that are available for clients.
The aim is to ensure that clients use their available allowances and exemptions and take advantage of any reliefs.
Here we cover income tax, childrens’ and married couples’ allowances, but you can read about pensions, Capital Gains Tax, inheritance tax and other areas in our full PDF version.
(Where references are made to tax planning for married couples and spouses, this includes civil partners.)
Married couples are each entitled to their own personal allowances for income tax purposes. For 2022/23, the standard personal allowance is £12,570.
Couples should therefore ensure that each spouse has sufficient income to fully utilise the allowances available and also maximising a spouse’s lower tax bands where available. This can be done in a number of ways, for example:
The ownership of income producing assets can be transferred between spouses without any tax implications. Alternatively assets can be held jointly, and the income split between them.
If a higher rate taxpaying spouse owns a life assurance bond, consideration should be given to assigning this to their spouse if say they were a basic rate taxpayer in order that any future chargeable events will avoid higher rate tax.
If there is a family trust in existence, the trustees could create taxable income for the spouse by allowing income payments to be made to take advantage of unused allowances and lower tax rates.
Family businesses could consider employing the spouse provided that such an arrangement can be justified commercially. It is important to bear in mind the National Minimum Wage rules when considering this. Auto-enrolment responsibilities would require pension contributions creating further tax savings.
Incomes should be split to ensure both spouses can make use of the dividend allowance (£2,000) and personal savings allowance (£1,000 for basic rate taxpayers and £500 for higher rate tax payers). Also, where a spouse has the £5,000 starting rate available that they have enough savings income to maximise it.
Where an individual has adjusted net income over £100,000, their personal allowance reduces by £1 for every £2 of additional income. This works out at an effective rate of tax on earned income of 60% between £100,000 and £125,140. Personal pension contributions reduce adjusted net income and can be used to retain all or part of the individual’s personal allowance.
Caution is however required to ensure that such gifts are not conditional or seen as deliberate tax avoidance.
Children’s Personal Allowances
Children also fall within the tax system and are therefore entitled to personal allowances. Parents should try to ensure that if possible, these allowances are used.
However, where a parent has supplied capital to a child, whether under trust or as an outright gift, any income arising will be taxable on the parent if the annual income exceeds £100 and the child is under 18 and unmarried. However, where the capital has come from a grandparent or other relatives etc, this will not apply, and the child’s allowances could be used.
Married Couples’ Allowance
The married couple’s allowance is only available where one of the spouses was born before 6 April 1935 and the maximum amount available for 2022/23 is £9,415. If their adjusted net income exceeds £31,400 then for every £2 above this sum the allowance is reduced by £1 but the allowance will not reduce below the basic allowance of £3,640.
This allowance is calculated based on:
For marriages entered into on or after 5 December 2005, married couple’s allowance is given to whichever of the two individuals has the higher income for the tax year in question, and the amount of the allowance is determined by the level of that individual’s income.
For marriages entered into before 5 December 2005, the allowance is given to the husband and the amount of the allowance is determined by the level of the husband’s income.
A couple who were married before 5 December 2005 may elect for the new rules to apply to them instead of the old rules.
A married woman (for pre-5 December 2005 marriages) or lower income spouse (for marriages on or after 5 December 2005) is entitled as of right to claim one half of the basic allowance. Alternatively the couple may jointly claim for an allowance equal to the whole of basic allowance to be given to the wife or lower income spouse as the case may be. In either case the allowance available to the other spouse is reduced accordingly.
If either spouse pays insufficient tax to use the full married couple’s allowance, they may notify HM Revenue & Customs that the unused amount is to be transferred to the other spouse.
The allowance is not given as a deduction from total income but by means of a reduction in the claimant’s income tax liability. The reduction is 10% of the amount of the allowance available so can reduce an individual’s tax liability from anything between £353 to £912.50.
If any part of this allowance is likely to be wasted due to an insufficient income tax liability, a claim should be made to reallocate it to the spouse if they can make use of it.
Read more in End of year tax planning 2022/2023.