The UK tax system views you as an individual, and will tax you as such based on your own income and gains. But if you follow that same train of thought when it comes to your tax allowances, you can end up wasting valuable tax relief and paying an unnecessarily high bill to HMRC.
Instead, consider embracing the advantages that come with being part of a family. Using everyone’s tax breaks efficiently can bring considerable tax savings, which could mean that your money lasts longer in retirement or that you’ll have more to pass on to future generations. So when it comes to allowances, it’s all about sharing. Don’t think “yours” and “mine”, but “ours”…
Of course, your family members’ tax allowances does mean you would be relinquishing some control of your money – and that won’t suit everyone. Speaking to a financial planner can help give you peace of mind about how it will all work, and will make sure your finances are set up in the best way for you and your family.
How to use your allowances to save tax
The first step may be a simple case of transferring savings across to a family member who is in a lower tax bracket. Unless you’re an additional rate taxpayer, you each have a personal savings allowance – £1,000 for basic rate taxpayers, £500 for higher rate taxpayers – to keep the interest you make on your savings free of tax.
And if you receive dividends from your investments there is an allowance for these too. Everyone has a tax-free dividend allowance of £5,000 – although this is being cut to £2,000 next year so plan ahead for the cut to make sure you don’t get caught out.
Pension funds for everyone
You probably know that you can use your partner’s ISA allowance to save tax efficiently, which now allows couples to save £40,000 into ISAs each year. However, not as many people know that you can do the same sort of thing with pensions. Thanks to the tax relief involved, flipping pension saving between different family members could actually work out as a better option than saving into ISAs.
Pensions are brilliant at being tax-efficient. The main problem though is how much you can save into them, as this is restricted by both the Annual Allowance and the Lifetime Allowance. If you earn more than £210,000 (including earnings from investments or property etc.) then you’ll only be able to pay £10,000 into your pension each year, which is a prime example of when using your partner’s allowance is especially useful.
However, if you’re a high earner it’s usually more sensible to use up your own annual allowance first. If one of you pays more tax than the other then it could be a good idea to divert pension savings to the highest earner as you normally get the tax relief from your contribution based on the higher tax rate – so you’ll get more.
It’s also worth remembering that making a pension contribution through salary sacrifice can reduce the income used to determine if you’re eligible for certain allowances and benefits. This could help you retain your full personal income tax allowance or even retain child benefit. A potential win-win for higher and additional rate taxpayers.
But don’t over-fill the pension pot
It’s important to bear in mind that there’s also a Lifetime Allowance for pensions of £1 million. That means that if your pension pot is worth more than £1 million when you come take your benefits, the excess will be taxed. If your pension pot looks like it could grow to around that figure, then making pension contributions to your spouse, partner or family member’s pension fund rather than your own could give you tax savings in the longer term.
Splitting your pension savings between two or more pension pots can have advantages when you come to take benefits too, as your income in retirement (after you’ve taken the 25% tax-free portion of your pot) will be subject to income tax. If, for example, you and your spouse each have an income from a pension, you will also each have a personal allowance giving your household double the amount of tax-free income each year. If just one of you is taking pension income, there’s only one personal allowance in play.
Here’s how much of a difference using two lots of allowances can make, compared to having all the pension wealth owned by one person:
Of course, for this strategy to work it does rely on you both being happy to share control of your pension savings, and for one of you to give up ownership of the bigger pot. The model above is also based on both people retiring at the same time, which might not be realistic. If it’s something you’re considering though, a financial planner could tell you how the same approach could work for the retirement you’re planning.
Sharing the profits
There are also other allowances which can be shared to access your savings more tax efficiently. Everyone has their own Capital Gains Tax (CGT) allowance and if you’re married you can transfer assets to your partner (and vice-versa) without creating a tax charge – effectively letting you use both allowances to offset any capital gains charges.
Changing who is taxable and the ability to control when tax becomes payable are both valuable planning options. Transferring assets to a lower taxpaying spouse could mean that gains can be taxed at 10% rather than the full 20% rate, which allows you to keep your CGT bill as low as possible.
The same sort of thing can also be done with investment bonds, except here there is even more opportunity as transfers aren’t restricted to married couples. Cohabitees can also transfer their bond into their partners name without creating a tax charge and it is also possible to assign bonds to non-taxpaying children. This may be a great way for the family to benefit from further unused allowances – and an efficient way to give your children money for something like university funding.
The more we share, the more we have
Considering your finances as a family could help tax relief go further, which can boost your savings and make them last longer in retirement. And it’s completely acceptable in the eyes of HMRC.
If you have any questions, your 1825 Financial Planner will happy to help, or you can speak to our specialist tax planning team directly:
- Phone – 0113 228 0900
- Email – firstname.lastname@example.org
Call charges will vary. We’re open Monday-Friday 9am-5pm.
This blog and any responses to comments should not be regarded as financial advice. Laws and tax rules may change in the future and your tax treatment is based on your individual circumstances. The information here is based on our understanding in June 2017. Investments can go down as well as up and you may get back less than you pay in.