Tax-Free Allowance
There are various ways to manage your income tax bill but the more income you have the harder it gets. We are going to look at the income tax on EIS, VCT and GiftAid later but for now let’s focus on the most common.
Many people we meet forget that every UK individual when they are born gains an income tax free allowance (the personal allowance). This has been creeping up over time and is now worth over £12,000 each year plus additional allowances for share dividends and bank interest. If you have one earner and one non-earner in a household, it is therefore worth putting taxable assets in the non-earner’s name to use their allowance each year. It is also worth trying to build up pensions in that person’s name because in retirement they will continue to have this tax-free allowance and it may be wasted if the earner has all the pension.
This seems obvious but it is common to meet couples where the earner/taxpayer deals with the finances and ends up with the assets in their name.
The same goes for children, who can have assets in their name producing tax-free income up to their own allowances and can also have a pension (with income tax relief) and an ISA. Their limits are lower, and you need to be careful when placing money in a child’s name, but it is attractive from a tax point of view.
A pension is a very good way of getting income tax back from the taxman (HMRC) provided you know your contribution limits (which get lower the more you earn). A pension contribution via payroll using ‘salary sacrifice’ can add a National Insurance saving as well. Some of our clients in England + Wales are getting back 60% income tax and 15.8% national insurance on their pension contributions, so nearly 76% relief (applies currently to incomes between £100,000 and circa £125,000). Our Scottish clients are paying even higher rates of tax and therefore saving even more than this on their pensions.
Income tax planning is available to Altor clients in our Core, Discounted and Family Services.
Nothing on this website or its links constitutes a personal recommendation; the information contained is designed to be informative but not to be relied upon as individual circumstances could affect the relevance of this guidance.