Households are paying more in taxes, research suggests. At a time when high inflation may be affecting your outgoings, finding ways to reduce your tax bill could be valuable. If you’re married or in a civil partnership, planning with your partner could help you get more out of allowances.
According to the Institute for Fiscal Studies, at the time of the last general election in 2019, UK tax revenues amounted to around 33% of the national income. By the time of the next general election in 2024, the figure is predicted to have increased to 37%.
Only during the immediate aftermath of the two world wars have government revenues grown by as much.
The think tank notes the response to the Covid-19 pandemic explains some of the increased tax burden. However, it adds higher government spending on things that pre-date the pandemic also plays a role.
On average, the changes mean households are paying an extra £3,500 each year in tax. Yet, the tax rise isn’t shared equally and some families may have seen their tax bill rise much further.
HMRC collected £19.8 billion more in tax between April and August 2023 than a year earlier
Figures released by HMRC support the claim that taxes are rising.
Between April and August 2023, HMRC receipts were £331.1 billion – £19.8 billion higher than the same period in the previous year.
Some of the receipts in the HMRC data are paid by businesses, but others come from individuals. For example, the amount of Income Tax paid was £9.5 billion more than a year earlier.
So, how could planning with your partner potentially reduce your tax burden?
Many of the tax allowances available are for individuals. As a result, passing assets to your husband, wife, or civil partner to utilise both of your allowances could be useful.
Here are five allowances you might want to consider as part of your financial plan.
1. Personal Allowance
The Personal Allowance is the amount you can earn before you’re liable for Income Tax. For 2023/24, it is £12,570.
If your spouse or civil partner doesn’t earn above this threshold, they may be able to pass on some of their unused allowance to you under the Marriage Allowance.
£1,260 of the Personal Allowance can be transferred to the partner with the higher income, which could reduce your annual income Tax bill by up to £252 each year.
The higher-earner must be a basic-rate taxpayer to use the Marriage Allowance.
2. Personal Savings Allowance
The Personal Savings Allowance (PSA) is the amount you can earn in interest before it could become liable for Income Tax.
As interest rates have increased over 2022 and 2023, you might face an unexpected tax bill if you don’t review how much your savings are earning.
Crucially, your PSA depends on the rate of Income Tax you pay. Basic-rate taxpayers can earn up to £1,000 in interest before paying tax. The PSA falls to £500 for higher-rate taxpayers, and additional-rate taxpayers don’t benefit from a PSA at all.
So, if you could exceed your PSA or you’re an additional-rate taxpayer, transferring savings to your partner may help you get more out of your money.
3. ISA allowance
In addition to the PSA, the ISA allowance may be useful to avoid paying tax on your savings.
Each individual can contribute up to £20,000 in the 2023/24 tax year to ISAs. You can choose a Cash ISA, where the money would earn interest, or a Stocks and Shares ISA, where your money would be invested and potentially deliver returns.
The interest or returns earned on money held in an ISA aren’t liable for Income Tax or Capital Gains Tax (CGT). Using both your and your partner’s ISA allowance could help you save or invest more efficiently.
4. Dividend Allowance
Dividends may be a helpful way to boost your income.
You might take dividends if you own a company or you could receive them through some investments. In 2023/24, you can receive up to £1,000 in dividends before tax is due.
If you might exceed this threshold, transferring dividend-paying assets to your partner could effectively double the amount you could tax-efficiently receive as a couple.
The rate of tax you pay on dividends above the allowance depends on your Income Tax band. So, if your partner pays a lower rate of Income Tax, transferring dividend-paying assets to them could also mean you benefit from a reduced tax bill.
You should note that the Dividend Allowance will fall to £500 in the 2024/25 tax year.
5. Capital Gains Tax annual exempt amount
CGT may be due when you dispose of certain assets, including investments that aren’t held in a tax-efficient wrapper, second properties, and some material items.
The annual exempt amount means that in 2023/24, you can make profits of up to £6,000 before CGT is due.
Similar to dividends, transferring assets to your partner could mean you’re able to use both of your annual exempt amounts and potentially benefit from a lower rate of CGT as your tax band affects the rate you pay.
In 2024/25, the annual exempt amount will fall to £3,000 for individuals.
Arrange a meeting with us to discuss how you could potentially reduce your tax bill
If you want to make the most out of your money and reduce your tax bill, please get in touch. We could help you create a long-term financial plan that cuts how much tax you pay with your goals in mind.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.