For 2012/13 there are three rates of income tax – the basic rate of 20%, the higher rate of 40% and the additional rate of 50%.
By transferring income to a lower earning spouse or civil partner it is possible to save tax at the higher rates, thereby reducing the combined tax bill.
John is an additional rate taxpayer with income (after deducting the personal allowance) of £170,000. His wife has income (after deducting personal allowances) of £50,000.
By transferring income of £20,000 to his wife, the marginal rate of tax is reduced from 50% to 40%, saving tax of £2,000 (10% of £20,000).
A word of caution: where it is not possible to reduce income below £100,000 for both partners to preserve personal allowances, care should be taken to avoid the high marginal rates that occur between the income limit and the level at which the personal allowance is fully abated (for 2012/13 between £100,000 and £116,210).
If John’s wife had been a basic rate taxpayer, the saving would have been £6,000 (30% of £20,000). It would have then been advisable to transfer sufficient income to use the whole of her basic rate band. For example, if she had income of £10,000 for 2012/13, to utilise her basic rate band fully, John should transfer income of £32,475 to his wife, which will bring her income up to the higher rate limit of £42,475 for 2012/13.
Equalising income where possible will ensure that personal allowances and lower tax bands are not wasted.
This is a sample tip taken from our 136 page guide:
101 Ultimate Tax Strategies Revealed.