lncome tax saving for couples
You might be able to save tax by switching income from one spouse or partner to the other. From the start of the next tax year, you should aim to use up both individuals’ personal allowances (£7,475 in 2011/12 and £8,105 in 2012/13) and minimise any higher and additional rate tax.
Income over £150,000 is taxed at 50% and the personal allowance is withdrawn where income (less certain deductions) is more than £100,000. You and your partner might be able to reorganise your financial affairs to avoid exceeding one of these limits. However, there might be capital gains tax to pay on switching ownership of an investment if you are not married or in a civil partnership.
If you are in business, you could pay a non-earning partner a salary, on which you will get tax relief. From the start of the next tax year you will not need PAYE records if the salary is below the national insurance contributions (NICs) limit of £464 a month in 2012/13. However, if the salary is between £464 and £633 a month, your partner will avoid paying any NICs, but will still qualify for state benefits, such as a pension. In particular, your partner’s benefits under the state second pension will accrue as if the annual salary were £14,400. (A minimum yearly income of £5,564 is needed to accrue state second pension in 2012/13). As well as salary, you can pay an employer’s contribution to your partner’s personal pension plan. There is no tax or NICs on the payment itself, and it should be an allowable business expense. Be warned that the total value of your partner’s salary, benefits and pension contributions must be justifiable in relation to the work performed.
Alternatively, you could plan ahead to share the profits of your business by operating as a partnership in 2012/13. You both need to be genuinely involved as business partners, though not necessarily equally.
If you operate your business as a company in which you and your partner both have shares, you should consider paying a dividend before 6 April 2012. This will be beneficial if the gross income (the dividend plus the tax credit) will fall into the basic rate band this year for one or both of you, or if at least one of you expects to pay tax at the additional rate next year but not this year.
You could even give shares to your spouse or civil partner shortly before paying a dividend, provided you genuinely transfer ownership. It is advisable to leave as much time as possible between the gift and the subsequent dividend payment.