Income tax saving ideas for all the family

Consider the split of income between husband and wife. A transfer of assets (which must be outright and unconditional) may serve to redistribute income and reduce or eliminate higher rate tax liabilities. For example it may be possible to save in excess of £8,000 a year by moving £37,000 of savings income from an income-rich spouse to one with no income. This level of tax saving is unlikely to be possible for many but significant savings can be made by much smaller transfers of income. Moving just £1,000 of savings income from a higher rate taxpaying spouse to one with income below the personal allowance (£4,895) will save £400 a year.

The tax treatment of married couples applies, from December 2005, to same-sex couples who have entered into a civil partnership under the Civil Partnership Act.

Income arising from assets owned jointly is generally split equally between the spouses unless a declaration is made to the Revenue stating that the asset is owned in unequal shares. This election can be made on a Form 17 but must be made before the income arises. Consider such a declaration when a new jointly owned asset is acquired. The exception to the equal splitting rule is dividend income from jointly owned shares in ‘close’ companies which is split according to the actual ownership of the shares. Close companies are broadly those owned by the directors or five or fewer people.

Income tax savings may be made if you are self-employed. Your spouse could be taken into partnership or employed by the business. This could be just as relevant for a property investment business producing rental income as for a trade or profession. Extreme caution must be exercised - the Revenue is looking at such situations to ensure they are commercially justified.

A spouse could be employed by the family company. However the level of remuneration must be justifiable and payment of the wages must actually be made to the spouse. The National Minimum Wage rules may also impact.

Parents must remember that their children are also potentially within the tax system. It may be possible to utilise the children’s personal allowances and starting/basic rate tax bands. However any income arising to a child but deriving from a parent will be taxed on the parent while the child is unmarried and under 18. This rule applies to income from outright gifts by parents as well as to income from trusts set up by parents.

National Savings children’s bonus bonds (for children under 16) are a means by which parents can provide capital for their children, which earns tax-free interest.

For children born since September 2002 a Child Trust Fund (CTF) has been introduced. The idea is to encourage tax-efficient savings by family and friends, with the government’s help, to build a nest egg which the child can access once he or she reaches age 18. The government’s initial contribution amounts to £250 (£500 for low income families) with a further payment promised once the child reaches age seven. Other contributions of up to £1,200 per annum can be added to the fund and although there is no tax relief on making the contributions the fund is tax exempt.

Income to use the child’s personal allowance could be provided by:

Note that dividend income is not an effective way to utilise the personal allowance - the tax credits are not repayable. Ensure other sources of income are available to use the allowance.

Taxpayers aged 65 and over are able to claim higher personal allowances. The benefit of these allowances is eroded where income exceeds £19,500. In such circumstances a move to capital growth or tax-free investments may preserve the higher age allowances.