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Income tax

The Chancellor gave details of the main personal allowances applicable for tax year 2002/2003.

These allowances, which have been raised in line with statutory indexation, are shown in the table below.

2001/2002

2002/2003

£

£

Personal Allowance &#45 standard

4,535

4,615

– Age 65 &#45 74

5,990

6,100

– Age 75 and over

6,260

6,370

Married Couple&#39s Allowance &#45 minimum amount

2,070 (B)

2,110 (B

– Age 65 – 74

5,365 (C)

5,465 (C)

– Age 75 and over

5,435 (A)

5,535 (A)

Age-related Allowances reduced if total income exceeds (D)

17,600

17,900

Maintenance to former spouse for all orders provided one party was 65 or over before 6 April 2000

2,070 (A)

2,110 (A)

  1. Relief at 10%.

(B) Minimum amount of MCA for age allowance purposes only.

  1. Relief available at 10% only if at least one of the couple was aged 65 before 6 April 2000.
  2. For 2002/2003 the reduction is £1 for every £2 additional income over £17,900 [£17,600 for 2001/2002]. Standard allowance(s) only are available if total income exceeds:-

2001/2002

2002/2003

£

£

Taxpayer aged 65 – 74 [personal allowance]

20,510

20,870

Taxpayer aged 65 – 74 [married couple&#39s allowance]

27,100

27,580

Taxpayer aged 75 and over [personal allowance]

21,050

21,410

Taxpayer aged 75 and over [married couple&#39s allowance]

27,780

28,260

COMMENT

  • Bearing in mind that a husband and wife each have their own personal allowance, more tax can be saved with planning. Both personal allowances should, if possible, be used to the full, particularly where only one of the spouses is a higher rate taxpayer.

As well as a transfer of investments, considerable scope may exist for a business owner to employ his or her spouse and possibly then provide a pension for him/her. With the alignment of the standard personal allowance with the Primary Threshold (the level of earnings at which employees start to pay Class 1 National Insurance contributions) and the Secondary Threshold (the level of earnings at which employers begin to pay National Insurance contributions), earnings of up to £89 per week should attract neither income tax (assuming that this is the taxpayer&#39s sole source of income) nor National Insurance contributions, which makes planning that much easier. Care should be exercised to ensure that all payments made will be a deductible expense for the payer. The greater the remuneration, the greater the care!

Special care needs to be taken by those considering taking their spouse into partnership. It seems that the Inland Revenue are sometimes keen to argue that a settlement of income exists resulting in an assessment of all the income on the “settlor” spouse. This risk may be less where the “lesser working spouse” is a partner from outset.

  • Age allowances apply separately to a husband and wife as does the total income limit of £17,900 above which the allowance reduces. By careful planning both spouses can qualify for age allowance. When investment income is in the age allowance “trap” it can suffer an effective rate of tax of between 30% and 33% so reinvestment in non-income producing assets should be considered. Capital investment bonds, capital growth orientated unit trusts, OEICs and ISAs (particularly with last year&#39s extension of the maximum subscription of £7,000 pa to April 2006) may be attractive as, (subject to guarding against “capital erosion”), “income” can be taken without loss of age allowance. With the bond, this will commonly be in the form of utilisation of the 5% annual withdrawal facility. In some cases, more than 5% can be taken (without an addition to total income which may impact on the age allowance) provided the first withdrawal is made in the second policy year.

Under current tax rules care should be exercised on final encashment of the bond or on part encashment over the cumulative 5% allowances as the entire chargeable event gain without top-slicing relief counts as income for age allowance purposes. However, careful advance planning can help to substantially reduce this problem.

In the case of unit trusts and OEICs, units or shares can be regularly encashed to make use of the annual capital gains tax exemption, after due allowance for any taper relief.

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