Everyone has a "personal allowance" of tax-free income (£5,035 in 2006/07), and lower rates apply to the first £33,300 above that. For an employee paying top rate (40%), the allowance and lower rates are worth over £8,250 in tax saved. On dividends and interest, which are taxed at different rates, you can save over £9,650.
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 £10,930 in tax and NIC each, £21,860
in total. That's just over 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 £27,300 in tax and NIC - nearly 25% 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.
You can't simply choose how you split the income on your tax returns - it belongs to whoever receives it. You can transfer income, and the tax charge, by:
- 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 (£9,650) requires a rich spouse to move £38,335 of investment income to a 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. The same goes for registered civil partners.
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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