01: Income tax saving for couples

You could be one of those couples who can save tax by switching income from one spouse or partner to the other. You should aim to use up both individuals’ personal allowances (£6,035 in 2008/09) and minimise any higher rate tax.

You could transfer investment income – at least for future years – by switching ownership of the asset that produces it, although there might be capital gains tax (CGT) to pay if you are not married or in a civil partnership.

In business

If you are in business, you could pay a non-earning partner a salary, on which you will then get tax relief. You will not need PAYE records if the salary is below the national insurance contribution (NIC) limit of £390 a month in 2008/09. However, if the salary is between £390 and £453, your partner will avoid paying any NICs, but will still qualify for state benefits, such as a pension. In particular, your partner’s benefits under the state second pension, S2P, will accrue as if the salary were £13,500.

As well as salary, you can pay an employer’s contribution to your partner’s personal pension plan. There is no tax or NIC on the payment itself, and it should be an allowable business expense. Be warned that the total value of your partner’s salary, benefits and pension contributions must be justifiable in relation to the work performed.

You could share the profits of your business by operating as a partnership. You both need to be genuinely involved as business partners, though not necessarily equally.

Dividends

If you operate your business as a company in which you both have shares, you should consider paying a dividend before 6 April 2009, if the gross income (including the tax credit) will fall into the basic rate band.

In a landmark ruling, the House of Lords gave the green light to this strategy, rejecting attempts by HM Revenue & Customs (HMRC) to tax the working shareholder on dividends paid to a partner. Planned legislation to stop couples using this ‘income shifting’ strategy has been postponed until at least 2010/11.

You could even give shares to your spouse or civil partner shortly before paying the dividend, provided you make a genuine transfer of ownership with no strings attached. You should leave as much time as possible between the gift and paying the dividend.

Useful link: www.hmrc.gov.uk  – HM Revenue and Customs site for information about tax, child and working tax credits, VAT and stamp duties.

Planning point: Couples can save income tax – and sometimes CGT too – by switching income-producing investments from the higher rate taxpayer to a basic rate or even non-taxpayer.Last Updated