Tax Breaks & Benefits for UK Households
When looking at a households aggregate tax burden, utilising tax breaks and benefits can make a real difference. If you invest a little bit of time in setting up your financial infrastructure to take advantage of these schemes, you may notice that you begin to retain more of your earnings.
Here are a few ideas:
Child benefit income
In most circumstances, you can claim child benefit if you are responsible for raising a child, amounting to £21.15 for the first child and £14.00 for each additional child, payable every 4 weeks.
This is a fantastic way to supplement your income, and gain access to financial support in raising your child.
You can make a claim here.
However, if you or your partner’s income exceeds £50,000, HMRC will seek a clawback of your child benefit income via the High Income Child Benefit Tax Charge at the end of the tax year. The charge equates to 1% of the benefit received for every £100 over the £50,000 threshold. This means for those earning £60,000 or over, your child benefit income will be fully withdrawn.
Married couples allowance
This is a useful allowance for couples where 1 married partner is earning income taxed at the basic or higher rates, whereby the other does not earn enough to breach their tax free allowance (known as the personal allowance, 21-22 - £12,570). In these circumstances, 10% of the lower earning partner’s personal allowance can be transferred to the partner who is being taxed. This can be initiated either over the phone to HMRC (be patient), via your online personal tax account, or ask me to tick the box on your tax return.
An additional £1,257 of tax free income is therefore transferrable to the partner being taxed.
Tax free childcare
Nursery fees are expensive. So much so that in some cases it can be cheaper for someone to look after their child during the day than go to work. This scheme addresses the anomaly by supplementing the cost of childcare.
You may be able to get 30 hours of free childcare per week for 38 weeks a year with a registered childcare provider. This depends on:
Both you and, if applicable, your partner earning over the national minimum wage (21-22 - £8.91ph) for 16 hours a week, and earning no more than £100,000 per year
The child is living with you
The child being under Reception age
Asset holdings (CGT and income tax)
Assigning assets to family members strategically can favourably impact your Income Tax and Capital Gains Tax (CGT) liabilities.
For example, splitting the ownership of investment property enables you allocate associated rental income by the same ownership percentages. This means that, subject to election, you can direct income from investments to a partner that may be exposed to lower or nil rates of income tax.
When assets are sold, more often than not they are subject to CGT. Every UK individual has access to an annual CGT tax free allowance (21-22 - £12,300). Again, by spending some time thinking as a family how best assets are owned, you can potentially unlock more tax free allowances available to you.
Finally, married couples have special freedoms to transfer assets that they have between each other without this being treated as a sale and triggering CGT or Inheritance tax issues. This further provides useful tools for family tax planning.
You may have a bank account set up for your child for them to have access to when they reach 18.
It’s worth ensuring that that bank account is a recognised Junior ‘Individual Savings Account’ (ISA). These products ringfence up to £9,000 of annual deposits as protection against future tax charges on interest income.
Admittedly interest income is a little hard to come by these days. However, you never know what the future may hold…
Employing family members
This totally depends on individual circumstances but this may interest business owners who a) have a genuine role available in their organisation, and b) are looking to release cash from their organisation into their household in a tax efficient manner.
By employing a family member, and paying that family member a salary, that business owner is reducing their profit and therefore their organisation’s tax bill. Furthermore, should that family member be otherwise a nil or basic rate tax payer, the effective tax rate of income tax and NI is reduced for the family as a whole. This is because a greater percentage of the family’s income is taxed at lower rates.
Shares are certificates of ownership of companies. Shareholders are the owners of shares. The way in which shareholders are remunerated are via dividends, which are a distribution of a company’s profits. Because the government wish to incentivise investment in order to stimulate economic growth and innovation, dividends are taxed at preferential rates compared to say income tax.
Furthermore, every individual is entitled to £2,000 of tax free dividend income.
A company proprietor may wish to consider appointing adult family members as shareholders of their company. This would unlock additional tax free allowances by directing dividends to family members who would have otherwise not used their dividend tax free allowance.
If planned appropriately, this could also reduce a household’s overall tax burden by utilising lower rates offered to dividends compared to employment or self-employment income.
Preparing for inheritance tax (IHT)
Inheritance tax is our way of helping social mobility by pooling a portion of an individual’s estate, to guard against wealth being passed down generation to generation.
However, the UK government also offer ways in which we can reduce our beneficiaries exposure to IHT by providing an annual gift allowance of £3,000. This is an attempt to unlock wealth that would otherwise be held in assets.
This means that we can gift up to £3,000 per year without it being added to the value of our estate, irrespective of when we pass on. Furthermore we can give gifts of up to £250 as many times as we like within the year (without it being added to the value of our estate), provided the recipient has not already benefitted from another allowance.
Many of us choose to give to charity, but many people fail to utilise the incentives offered to us to stimulate charitable donations.
If you pay tax above the basic rate, you can claim the difference between the rate you pay and basic rate on your donation. You can do this by amending your tax code or making a disclosure in your tax code.
Your employer may also operate a payroll giving scheme. By diverting your charitable donations so that they are paid via a scheme such as this, the donation is paid before tax is deducted from your income.
There are also big IHT benefits if you include a charitable donation in your will.