Independent taxation planning still forms a central plank of tax planning for married couples. Most of these strategies need a full tax year to operate to give maximum effect so these suggestions may serve as a reminder for the coming tax year.
A husband and wife each have their own personal allowance. This is particularly relevant where one spouse is a non-taxpayer, 10 per cent taxpayer or basic-rate taxpayer and the other a higher-rate taxpayer. A non-working spouse can receive income of £4,615 for 2003/04 before he or she pays any tax and the next £1,960 is taxed at only 10 per cent.
Where a working spouse owns investments, income from these may suffer income tax at a rate of up to 40 per cent or 32.5 per cent if dividends. Therefore, subject to practical considerations, the transfer of assets to a non-working spouse can save tax and increase overall investment returns. Such transfers must be outright and unconditional. Where possible, a couple should try to ensure that pension plans are taken for each of them so that the personal allowance of each can be used in retirement to ensure maximum tax freedom and low tax on the pension.
Since April 6, 2000, the married couple's allowance has not been available for people aged under 65. However, it continues to be available where one of a married couple was aged 65 or over on April 5, 2000. For such married couples, up to £1,075 of the allowance, which is due to the husband, can be transferred to the wife at her request, or £2,150 of the allowance can be transferred to the wife if the husband and wife jointly so elect. For such elderly people, an election must be made before April 6, 2004 if it is to be effective for 2004/05.
Relief for the married couple's allowance is given at a flat rate of 10 per cent. This means that if each of the couple are taxpayers, reallocating the allowance is not going to produce a tax advantage. However, an election will produce a cashflow advantage if a husband is taxed under Schedule D and his wife under PAYE.
If a husband simply has insufficient income to use the married couple's allowance, unused allowance can always be transferred to his wife.
Older married couples benefit from an increased age-related personal allowance. However, this will be cut back if the total income of a particular spouse exceeds £18,300 for 2003/04 (£18,900 for 2004/05). This limit applies separately to each of a married couple. In the right circumstances, careful planning by transferring investment capital to rearrange income between spouses can improve tax-efficiency. Alternatively, by using suitable investment products, the replacement of taxable income by non-taxable income or non-taxable withdrawals of capital can improve the tax position considerably.
For those engaged in a business, it can sometimes be worth considering the payment of a salary to a lower or non-taxpaying spouse, provided that he or she performs work for the business that justifies the payment. This could be at such a level to ensure that it is free of income tax and National Insurance, that is, currently up to £89 a week, increasing to £91 a week for 2004/5, assuming this is the taxpayer's sole source of income.
A pension payment can then be made in respect of this salary, meaning more tax savings are secured into retirement.