Do you earn the lion’s share of the household income? Equalise your income to save up to £15k a year!
It is common for household income to not be generated in equal proportions; typically one spouse earns the lion’s share whilst the other earns significantly lower or none at all.
This gives opportunity to be “creative” with the allocation of income for tax purposes to make sure, as a family, the tax paid overall is economical (and you can then still afford the dream “family” holiday or the new “family” car!)
First to clarify, this applies to same sex civil partnerships as well as husbands and wives.
A key mechanism for “equalising income” is the reallocation of earnings from business activities. By allocating sufficient income to the low or non-earning spouse to use up their tax free personal allowance, can result in savings of between £10k and £15k a year, depending on the tax rates paid by the “bread winner”.
Similarly, income from family businesses can be allocated tax effectively by making the low or non-income earning spouse a partner or shareholder in the business.
Both of these take some tax planning by an accountant to maximise savings so best not to cross this bridge alone, seek some guidance beforehand.
In addition to this, some simple methods to reallocate income to the spouse or civil partner include:
- Bank interest received from savings
- Rental property income – where a profit is made from letting property
- Income from the “pay-out” of investments
Employing family members in the business can also lend to the same tax benefits when planned effectively, using similar methods to those mentioned; each family member will have a personal allowance and basic rate tax band that can be utilised.
For both a spouse and family members alike, there does need to be an evidence of work taking place in exchange for the income earned. In practical terms, there is typically involvement from the “other half” even if they are not specifically “hands on” in the business. This could be along the lines of project / diary management or bookkeeping and managing finances.