The artful maximisation of nil-rate tax bands

Your basic personal tax-free allowance, starting tax rate, and the new zero-rate bands for savings income and dividends could mean you benefit from £19,850 tax free, would you like to know how?

Re-cap on allowances and rate bands from 6 April 2018:

  • The tax-free personal allowance for 2018/19 is £11,850;
  • The personal savings allowance (PSA) allows basic-rate taxpayers up to £1,000 savings tax-free; higher rate taxpayers can receive up to £500 tax-free; additional rate taxpayers are not eligible;
  • Banks and building societies no longer tax at source and pay interest gross;
  • Changes to rates on dividend tax ended the grossing-up of dividends, now a £2,000 dividend nil-rate band (DNRB) applies.
Nil rate tax band

Tax-free allowances As a basic-rate taxpayer, you are allowed:

  • £1,000 tax-free interest income;
  • Added to the starting rate for savings, applicable for up to £5,000 of savings income;
  • DNRB adds a further £2,000 tax-free.

How do these tax-free allowances add up to 0% starting rate for savings income Keeping your income at less than £17,850 allows you to maximise the benefit of the tax-free allowances and rate bands (not counting income from savings and investments), but it’s even better if you can keep your income at £11,850, or less, and maximise tax-free income by splitting it with your spouse or civil partner.

Ideally Ideally, for a chance to benefit from £19,850 tax-free you will earn no more than £11,850 in income and £2,000 in dividends and you will not have over £6,000 savings income. Even more ideally, you will employ your spouse through your company on a very modest income to maximise use of tax allowances, and pay dividends, as well consider shifting savings between you and your spouse or civil partner to make use of the new savings allowance and starting rate.

Here is an example Ruth owns 100% shares in her company ABC. She draws a modest salary of £11,850 and the company makes annual profits of c. £30,000, mostly paid to Ruth as dividends. She has annual savings income of £4,500.

Ruth’s husband Roger has savings income of £8,850 plus a state pension of £9000 per year, and so Ruth transfers most of her savings to him and gives him 10% of the shares she holds in ABC, bringing his annual income up to c.£20,850. Ruth makes use of virtually all the tax free elements to minimise what she owes to HMRC and stays within the basic rate band.

Ruth can transfer as many ordinary shares as she wishes to Roger compliantly, which is a very good way to share income between spouses.

Of course, it is not always possible to exploit all the tax-free elements, but keeping income within the basic rate band, i.e. by using pension contributions, ensures you qualify for the maximum PSA.

Please get in touch if you would like to discuss this or any other tax planning issue with your account manager.

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