Married couplesMarried couplesMarriage gives limited scope for income tax planning, but spouses are taxed separately. Therefore, by careful planning maximum use can be made of personal reliefs and the starting and basic rate tax bands. Given that the personal allowance cannot be transferred between spouses it may be necessary to consider gifts of assets (which must be outright and unconditional) to even up incomes.
Income from jointly owned assets is shared equally for tax purposes. This applies even where the asset is owned in unequal shares unless an election is made to split the income in proportion to the ownership of the asset.
Tip
If you are self-employed, consider employing your spouse or taking them into partnership as a way of redistributing income.
Note
Care must be taken because the Inland Revenue may look at such situations to ensure they are commercially justified.
If a spouse is employed by the family company, the level of remuneration must be justifiable and the wages actually paid to the spouse. The National Minimum Wage rules may also impact.
Taxpayers aged at least 65 should consider how to make full use of the available age allowances. The higher allowances are gradually withdrawn once income exceeds £17,900.
Tip
Consider switching to non-taxable or capital growth oriented investments to avoid losing out on allowances.
Children have their own allowances and tax bands. Therefore it may be possible for tax savings to be achieved by the transfer of income producing assets to a child. Generally this is ineffective if the source of the asset is the parents and the child is under 18. In this case the income remains taxable on the parents unless the income arising amounts to no more than £100 gross per annum.
Tip
Consider transfers of assets from other relatives (eg grandparents) and/or earnings from the family business for teenage children to use personal allowances, starting rate and basic rate tax bands.
Remember that children also have their own capital gains tax (CGT) annual exemption (£7,700). It may be better for parents to invest for capital growth rather than income.
Children or any other person whose personal allowances exceed their income are not liable to tax. Where income has suffered tax deduction at source a repayment claim should be made. In the case of bank or building society interest, a declaration can be made by non-taxpayers to enable interest to be paid gross.
Remember that the 10% starting rate applies to all types of income so that if the only source of taxable income is bank or building society interest the first £1,920 (for 2002/03) is liable at only 10%. If 20% tax has been deducted at source a repayment may be due.
Tax credits on dividends are not repayable so non-taxpayers should ensure they have other sources of income to utilise their personal allowances.
If the payment of bonuses to directors or dividends to shareholders is under consideration, give careful thought as to whether payment should be made before or after the end of the tax year. The date of payment will affect the date tax is due and possibly the rate at which it is payable.
Tip
The rates of national insurance (NI) rise by 1% in April 2003 for both employer and employee. Consequently any bonus paid before the end of the current tax year will avoid these additional charges. It may be worth deliberately bringing forward the payment of remuneration or bonus into the current tax year to save NI.
Alternatively consider the payment of a pension contribution by the company on behalf of an employee since this is tax and NI free.