Prudent use of the whole family’s tax allowances in tax planning can help reduce the tax burden.
Use all your personal allowances
Every individual is entitled to their own personal allowance (PA), which is £12,570 for the 2021/22 tax year. A key element in tax planning is to make best use of the PA. If your spouse or civil partner has little or no income, you might want to consider the ownership of income-producing assets. This may involve redistributing income-producing assets to minimise the couple’s tax liability – but be mindful of the settlements legislation governing ‘income shifting’. Any transfer must be an outright gift, with ‘no strings attached’.
Certain couples may also be eligible to transfer 10% of their PA to their spouse. The Marriage Allowance is available to married couples and civil partners where one spouse has income below the PA and neither spouse pays tax at the higher or additional rate. It means £1,260 can be transferred in 2021/22, reducing a couple’s tax liability by up to £252 in the current year. The claim must be made within a specified timeframe; please ask us for help if you think this allowance may apply to your circumstances.
For tax purposes, children are treated independently. They have their own PA, and their own savings and basic rate tax band. They also have their own capital gains tax (CGT) annual exemption. In some cases, a tax saving can be made by transferring income-producing assets to a child. However, when moving assets from a parent to a child who is a minor, any income generated in excess of £100 will still be taxed on the parent. It is therefore not always possible to use a child’s PA by means of a parent transferring income-producing assets.
Reducing taxable income
It is possible to reduce your taxable income through various means (for example, increasing contributions into a pension scheme or making charitable donations via Gift Aid). This may be beneficial if you or your spouse or partner are receiving Child Benefit and either of your incomes are expected to be between £50,000 and £60,000. Reducing income to below this level may help to eliminate the High Income Child Benefit Tax Charge, which applies at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. You might also want to consider adopting a similar option if your income is just above £100,000, as the PA is reduced by £1 for every £2 of income over this figure.
Give to charity
If you make a charitable donation under the Gift Aid scheme, the charity can claim back 20% basic rate tax on any donations. Using Gift Aid can also generate a refund for higher rate and additional rate taxpayers. Such taxpayers can claim back the tax difference between that higher rate and basic rate on that donation.
A cash gift of £100 could result in a £25 tax refund for a higher rate (40%) taxpayer under the Gift Aid scheme, in addition to a £25 payment to the charity generated by the taxman. Donations by Scottish taxpayers paying at the starter rate of 19% will be treated in the same way as 20% taxpayers in the rest of the UK. Scottish taxpayers using Gift Aid who pay tax at a rate higher than 20% can claim the difference between this and the basic rate.
It is important that all donors check that they have paid enough tax to cover the Gift Aid claim.
For further advice on tax planning across the family, please get in touch or download and read our full guide here.
