1. Make the most of each spouse’s income tax allowance and tax bands
Married couples (or those in a registered civil partnership) may consider transferring income- yielding savings and investments into the name of the spouse who pays the lower rate of tax. This aims to make full use of personal allowances, the new personal savings allowance and basic rate tax bands, where applicable. The increase in personal allowance to £11,000 provides greater opportunity for tax free income.
2. Maximise your annual tax-free dividend allowance
Each person is now entitled to a new tax-free dividend allowance of £5,000 per annum. Married couples (and registered civil partners) could spread their taxable portfolios between them to make full use of each person’s allowance.
3. Make full use of ISA allowances
There is no capital gains tax and no UK income tax to pay within an ISA. Therefore, we believe it makes sense for the majority of investors to consider using their full allowance each year where possible.
Married couples should ensure both consider using ISA allowances in full. Even if one spouse is a non-taxpayer it still often makes sense to use their ISA. It usually costs no more, and in some cases, much less, to hold an investment within an ISA.
4. Make full use of pension contributions
Making full use of pension allowances is still one of the most tax efficient ways to save for retirement and the annual allowance and carry forward rules are potentially highly beneficial.
Tax relief on contributions is normally available at the basic rate (20%) for all investors under age 75 and at the highest marginal rate paid by higher and additional rate taxpayers depending on their circumstances (see page 10). Furthermore, the ability to carry forward the unused annual allowance from the last three years potentially enables a turbo boost or substantial catch-up of contributions. Even for those with no earnings and who are non-taxpayers, anyone under 75 can still invest £2,880 in a pension and the taxman will top-up their contribution to £3,600. Building up a pension in both names may be one of the most tax efficient ways of generating income in retirement. The personal allowance, the amount of taxable income you’re allowed to receive each year tax free, is £11,000. With careful planning married couples can receive income from pensions, savings and investments of £34,000 a year tax free by using their personal savings and dividends allowance.
5. Protect the personal allowance
Taxable income of more than £100,000 will reduce the personal allowance. For every £2 of taxable income over £100,000 £1 of personal allowance is lost. Once taxable income is above £122,000 the whole personal allowance is lost. To retain the personal allowance, one option to consider is to reduce taxable income to £100,000 by making a pension contribution.
For example, if the taxable income is £106,000 the loss of personal allowance will cost an extra £1,200 in tax. This is because £3,000 of the personal allowance is lost. If a pension contribution of £6,000 gross is made this saves £1,200 in tax and there would be tax relief on the pension contribution meaning a total tax saving of £3,600. Please note pension benefits cannot be drawn until age 55 (rising to age 57).
6. Protect child benefit
For families with children, if one parent has a taxable income of more than £50,000 per annum, their entitlement to child benefit will be “reduced”. This works by applying an additional tax charge on a sliding scale from £50,000, so that any child benefit is completely lost if taxable income is £60,000 or more.
One way to avoid these additional high income child benefit tax charges is to reduce taxable income to £50,000 by making a pension contribution. For example, if the taxable income was £52,000 20% of the child benefit would be lost by the additional tax charge. To solve this tax issue, it should be possible to make a pension contribution of £2,000. This will save £800 in income tax and preserve the child benefit.