Everyone has a "personal allowance" of tax-free income (£5,225 in 2007/08), and lower rates apply to the first £34,600 above that. For an employee paying top rate (40%), the allowance and lower rates are worth over £8,500 in tax saved. On dividends and interest, which are taxed at different rates, you can save as much as £9,875.
The problem is that not everyone can use their allowances in full. In a family where one partner goes out to work and the other raises the children, the carer (and the children) don't have much income. If the "breadwinner" is a higher rate taxpayer, this is a waste.
Take two couples. In one, each partner has a taxable income, all salary, of about £40,000. They will pay about £10,725 in tax and NIC each, £21,450 in total. That's nearly 27% of their combined income of £80,000. In the other couple, one partner has a salary of £80,000, and the other has none. The earner will pay about £27,125 in tax and NIC - 26% more than the couple who can split their income. If the income isn't subject to NIC, the difference is much greater - there's more NIC to pay on two separate salaries than on one big one.
It is not always easy to transfer income between husband and wife in order to take advantage of allowances, but the following methods are possible:
- an outright gift of savings and investments which produce taxable income;
- putting savings and investments into joint names and sharing the income;
- employing the spouse in a business;
- taking the spouse into partnership.
The biggest saving (£9,875) requires a rich spouse to move £39,825 of investment income to one with no income, but you can save a worthwhile amount on smaller gifts. A 40% taxpayer whose spouse has income below the personal allowance will save £400 a year on a transfer of
just £1,000 of taxable income.
Capital gains are much easier to transfer for tax purposes, so if you are likely to realise a gain above your annual exemption, you could transfer the asset to your spouse first and save a fair amount of tax.
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