Extra tax savings for married couples and civil partners
The overview highlights tax savings for married couples and civil partners, including marriage allowance and joint tax benefits, leading to reduced tax liabilities
Tax rules concerning married couples and those in a civil partnership are complicated but can enable individuals to reduce their tax bill in a legally sound way.
Given the complex nature of these particular tax rules, it’s highly advisable to consult a tax professional, who can review your specific situation and give you tailored advice.
Meanwhile, here is a simple overview of three ways in which couples may be able to reduce their tax liability:
Marriage allowance lets you transfer £1,260 of your personal allowance to your husband, wife or civil partner. It can benefit couples where one person is earning less than the personal allowance (currently £12,570) and the other person pays income tax at the basic rate (i.e. their income is between £12,571 and £50,270).
The person with the lowest income needs to apply for marriage allowance online. This can take up to two months to be processed and then the person with the higher income will get their new personal allowance when they send in their next self assessment tax return.
As it stands, the higher earner’s tax bill could be reduced by up to £252
Even if the reduction in the lower-earning person’s tax-free allowance means a small part of their income is now taxable, you could still pay less tax overall as a couple.
If you’re not sure what your taxable income is, or you receive other income - such as dividends, savings or benefits from your job - you should call the income tax helpline.
If you’re both basic rate taxpayers, one option is to set up a business partnership. Business partners share the profits from the business, but each partner only pays tax on their share. So, splitting the rental profits from your property business may mean you can avoid one or both of you moving into a higher income tax band.
Although we’ve explained this in some detail below, it is a complicated area of tax and you shouldn’t go down this route without the advice of a professional tax expert.
Example
As a couple, you earn £50,000 a year from rental income and each earn £25,000 from other paid work.
(The following is a simplified calculation.)
If the whole £50,000 goes to one person, their total earnings of £75,000 will be taxed as follows:
The first £12,570 is tax-free (personal allowance)
The next £37,700 is taxed at the basic rate of 20% = £7,540
The remaining £24,730 is taxed at the higher rate of 40% = £9,892
That gives a tax bill of £17,432
Meanwhile, the other person will pay £2,486 in tax on their earnings (£25,000-£12,570 x 20%), meaning you pay a total of £19,918.
However, if this rent is paid to a partnership and each partner has a 50% share, each will receive £25,000 in rental income. Now the tax calculation is based on a total income of £50,000 for each person:
The first £12,570 is tax-free
The remaining £37,430 is taxed at 20% = £7,486
Total tax paid as a couple = £14,972
By setting up as a partnership, you have reduced the tax your household pays by £4,946 – which is now in your pocket rather than with HMRC.
And it may be worth setting up as a limited liability partnership (LLP) because partners in an LLP aren’t personally liable for debts that the business can’t pay. That helps protect you financially in the event that your business struggles in the future.
You’ll need to decide on a business name and choose a ‘nominated partner’ who must register the partnership with HMRC and will be responsible for sending the tax return for the business.
Both partners must be registered with HMRC and must send their own self-assessment tax returns.
Bear in mind that this is a very broad overview of partnerships and you should consult a tax specialist as well as taking legal advice before moving ahead with any such plans.
If you are married and one of you earns less than the other, as long as you own the property individually – via tenants in common – you can reduce the tax liability between you.
For example, if the higher earner owns a 20% share of the property and the lower earner 80%, then the income and any capital gains can be split 20/80.
However, you can’t just decide this between you, it has to be reflected in the property’s ownership. As this can be quite complicated, we advise you to contact a property tax professional to assess your percentage split.
If you might pay higher rate income tax: setting up a private limited company
Private limited companies are legally separate entities from the people who run them.
One financial advantage of owning and/or letting property through a private limited company is that you can take profits out of the company in such a way that you are likely to pay less tax.
You can pay yourself a salary within the basic rate of income tax and have your partner claim Marriage Allowance - or pay your partner a separate salary. You can then pay out further profits to people with a share in the company, in the form of dividends.
Shares can also be bought, sold and transferred if you want to bring more members of your family into the company and it can be an effective way of avoiding having to pay income tax at the higher rate.
The disadvantage is that it takes more work to set up a private limited company than a partnership and you have various legal responsibilities as a director of the company.
As with partnerships in the section above, you should consult a financial adviser or wealth manager to discuss whether setting up a limited company would be appropriate or worthwhile for you and your business. It’s not right for everyone and is not something that should be entered into without serious consideration.
