Since we know that we will always get taxed, what we should always do is plan. Now planning can cover a variety of situations, like reducing tax overall, or perhaps even take yourself out of tax altogether. The one thing everyone should do is plan things so you get the smallest tax bill you can. You owe it to yourself and your family.
The key area of planning we would like to cover here is the use of tax allowances. Bear in mind most allowances are given for a specific year, and if you don’t use them, you lose them. It is therefore only common sense to use as much of them as you can.
“There are only two things certain in life – Death and Taxes” (Benjamin Franklin)
The main one is the personal allowance which everyone gets. In an ideal world, we would like to see all household income split 50/50, but that is not possible with PAYE income of course. For all investment income in a household, it is down to each couple as to who this belongs to, so couples can split this according to their situation. If both spouses are working, it can get split 50/50; if only one works, it can be split 1/99, i.e. whatever uses up unused allowances. Buy to let property income is an ideal example as well.
In the current tax year, each individual can have dividends up to the value of £5,000 non-taxable, and savings income up to £1,000. This is reduced to £500 for higher rate tax payers and nil for additional rate tax payers. So, once again the argument is there to split such income between spouses as suits you and not HMRC. Even if dividends are higher than £5,000 per year, bear in mind that if someone is liable at basic rate tax, then dividends over £5,000 per year are taxed at 7.5%; for someone liable at higher-rate tax, dividends over £5,000 are taxed at 32.5%, so there are still some savings to be made.
Self-employed people should also consider employing their spouses as this is a good way to “spread” income. It’s not just a case of putting this into a set of accounts – there does have to be some substance behind the figures, so some planning and logistics should take place before you automatically just jump in. PLAN!
Remember that for most allowances it is a case of use them or lose them.
If you would like help with tax planning, please call us on 0345 241 1808 or e-mail us on firstname.lastname@example.org.
The Financial Conduct Authority does not regulate tax advice