Everyone has a "personal allowance" of tax-free income (£6,475 in 2009/10), and the next £37,400 is taxed at 20%. You pay £10,070 less tax on the first £43,875 than on the next £43,875 (taxed at 40%). If your income includes dividends, which are taxed at different rates, the reduction may vary.
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) may not have much income. If the "breadwinner" is a higher rate taxpayer, this is a waste.
Take two couples. In one, each partner has £45,000 in salary. They'll pay about £12,140 in tax and NIC each, £24,280 in all. That's just under 27% of their combined income of £90,000. In the other couple, one partner gets £90,000, and the other has no income. The earner pays about £30,590 in tax and NIC - about a quarter more than the couple who split their income. If the income isn't subject to NIC, the difference gets bigger - 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.
HMRC can challenge some of these if they think the transfer is not genuine - it's important to take advice to be sure that the plan will work.
The biggest saving (about £10,000) comes from moving £43,875 in investment income to someone with no income, but smaller gifts are also worthwhile. A 40% taxpayer can save £400 a year on a transfer of just £1,000 of taxable interest income if the spouse stays below £6,475 in total.
Capital gains are easier to pass on for tax. If you are likely to realise a gain above your annual exemption, you could transfer the asset to your spouse first and save up to £1,818.
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