Spouses are taxed as independent persons, each of whom is responsible for their own tax affairs. The phrase ‘spouse’ whenever used in this guide includes a registered civil partner.
In principle all individuals are entitled to a basic personal allowance before any income tax whatsoever is paid. However, some individuals on high incomes may receive a reduced or even no personal allowance. This is explained further below.
The 2024/25 personal allowance is £12,570. Tax bands and rates are applied to each spouse separately, so that each may generally have taxable income up to £50,000 before they start to pay higher rate tax. See the income tax rates table for the different rates and bands which apply to Scottish taxpayers.
For spouses there is no aggregation of income, no sharing of the tax bands and except in limited circumstances detailed later in this guide the personal allowance may not be transferred from one spouse to the other.
Where an individual’s total income exceeds £100,000 the personal allowance is reduced by £1 for every £2 of income in excess of that limit. This means that an individual with income of £125,000 or more will not be entitled to any personal allowance.
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Tax Tip |
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If your income is in the range £100,000 - £125,000 the restriction in your personal allowance is the equivalent of a tax cost of 60%. You may want to consider making or increasing certain payments which are tax deductible to minimise this tax cost. Examples include pension contributions (which may be subject to restrictions) and charitable donations. |
The income tax bands and rates for 2024/25 are determined by where you live in the UK and the type of income you have.
For most UK residents the following tax rates and bands apply:
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Income tax band £ |
Rate % |
Dividend rate % |
|---|---|---|
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0 - 37,700 |
20 |
8.75 |
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37,701- 125,140 |
40 |
33.75 |
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Over 125,140 |
45 |
39.35 |
In addition some taxpayers may be entitled to the starting rate for savings which taxes £5,000 of interest income at 0%. However this rate is not available if non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.
For 2024/25 the tax rates and bands applicable to Scottish taxpayers on non-savings and non-dividend income are as follows:
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Scottish income tax band £ |
Band Name |
Rate % |
|---|---|---|
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0 - 2,306 |
Starter |
19 |
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2,307 - 13,991 |
Basic |
20 |
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13,992 - 31,092 |
Intermediate |
21 |
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31,093 - 62,430 |
Higher |
42 |
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62,431 - 125,140 |
Advanced |
45 |
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Over 125,140 |
Top |
48 |
Scottish taxpayers pay tax on their savings and dividend income using the UK rates and bands.
Income tax is devolved to Wales from 6 April 2019. However Welsh taxpayers continue to pay the same overall tax liabilities as taxpayers in England and Northern Ireland.
Individuals may be entitled to Savings Allowance (SA) with savings income within the SA taxed at 0%. The amount of SA depends on an individual’s marginal rate of tax. An individual taxed at the basic rate of tax has an SA of £1,000 whereas a higher rate taxpayer is entitled to an SA of £500. Additional rate taxpayers receive no SA.
The Dividend Allowance (DA), available to all taxpayers regardless of their marginal tax rate, charges the first £1,000 of dividends to tax at 0%. Dividends received above this allowance are taxed at the rates shown in the table in 'Tax rates and allowances' above.
Dividends within the DA still count towards an individual’s basic or higher rate band and so may affect the rate of tax payable on dividends above the £1,000 allowance.
Dividends are treated as the top slice of income. So the basic rate tax band is first allocated against other income.
It follows from the basic rules set out above that tax is minimised if spouses equalise, as far as possible, their income so that personal allowances, SA and DA are fully utilised and higher/additional rates of tax are minimised.
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Example |
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In 2024/25 Ian and Angela have savings income of £50,000, dividend income of £50,000 and no other income. If this is split equally between them, the total tax bill for the couple is £6,772. If only one spouse has an income of £100,000 and the other has nothing, the total tax bill leaps to £22,924 - an additional £16,152! |
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Tax Tip |
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If you are feeling charitable, remember that a donation to charity under the Gift Aid scheme benefits from tax relief. It makes sense for a higher rate/additional rate taxpayer spouse to make such donations so that they can benefit from the extra tax relief. Alternatively, in some circumstances, donations can be carried back to attract tax relief in the previous tax year. |
Married couples and civil partners may be eligible for a Marriage Allowance (MA).
The MA enables spouses to transfer a fixed amount of their personal allowance to their spouse. The option to transfer is not available to unmarried couples.
The option to transfer is available to couples where neither pays tax at the higher or additional rate. If eligible, one partner will be able to transfer 10% of their personal allowance to their partner which means £1,260 for the 2023/24 tax year.
For those couples where one person does not use all of their personal allowance the benefit will be up to £252 (20% of £1,260).
Married couples will often own assets in some form of joint ownership. If they do not, then it may be advantageous for tax purposes for transfers to be made to ensure joint ownership.
This can have benefits for income tax, CGT and even inheritance tax.
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Tax Planning |
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If you and your spouse are both involved in running a business, income can be equalised if you are equal partners or equal shareholders. Alternatively, if only one of you is involved, the other could be employed in a small capacity, drawing a salary to use up their personal allowance. |
Where assets are owned in joint names, any income is deemed to be shared equally between the spouses. If the actual ownership shares are unequal, income is still deemed to be split equally unless an election is made to split the income in the same proportion as the ownership of the asset.
This does not apply to shares in close companies (almost all small, private, family owned companies will be close companies) where income is always split in the same proportion as the shares are owned.
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Example |
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A buy to let property is owned three quarters by Helen and one quarter by her husband Mark. If no election is made the net rental income on which tax is payable will be split 50:50. If an election is made the income will be split 75:25. A choice can be made according to which is the most desirable when other income of the spouses is taken into account. |
Independent taxation also applies to CGT. Each spouse is entitled to take advantage of the annual exemption of £3,000 before any CGT has to be paid.
This is advantageous where assets are held jointly and then sold as each spouse can use their annual exemption to save tax.
The transfer of assets between spouses is neutral for CGT. This is sometimes done shortly before assets are sold, to minimise tax. Advice should be sought before undertaking such transactions to ensure that all tax aspects have been considered. Please contact us for CGT advice.
It is often assumed that children are not taxpayers. In fact HMRC will tax a child just as readily as anyone else if the child has sufficient income to make them liable.
Children have their own personal allowances and tax bands. Where their only income is, at best, a few pounds from a paper round or a Saturday job, there may be some scope for transferring income producing assets to the children to use up their personal allowance.
However, such assets should not be provided by a parent, otherwise the income remains taxable on the parent, unless it does not exceed £100 (gross) each tax year.
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Tax Planning |
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There is nothing to stop you employing your children in the family business so as to take advantage of their personal allowance. There are age restrictions (with some exceptions the minimum age is generally 13 years old) and legal limitations as to the type and duration of the work. It is also essential that payment is only made for actual work carried out for the business and at a reasonable commercial rate. |
Children also have their own annual exemption for CGT so that assets transferred to them which have a bias towards capital growth rather than income may prove to be more advantageous.
The availability of new CTFs ceased from January 2011, as did government contributions to the accounts. Existing CTFs however continue to benefit from tax free investment growth. No withdrawals are possible until the child reaches age 18. However, the child’s friends and family are able to contribute up to the annual limit of £9,000. It is possible to transfer the investment to a Junior Individual Savings Account.
CTFs started to mature from September 2020 when the first eligible children begin to turn 18. On maturity funds can be either withdrawn or transferred to either a matured CTF account or an ISA in order to maintain the tax advantages.
A Junior ISA is available for UK resident children under the age of 18 who do not have a CTF account. JISAs are tax advantaged and have many features in common with other ISAs.
They are available as cash or stocks and share based products but a child can only have one cash JISA and one stocks and shares Junior ISA. The annual investment is limited to £9,000.
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Tax Planning |
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There are some other limited ways income can be transferred to children tax efficiently such as:
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A charge arises on a taxpayer who has adjusted net income over £60,000 in a tax year where either they or their partner are in receipt of Child Benefit for the year. Where both partners have adjusted net income in excess of £60,000 the charge applies to the partner with the higher income.
The income tax charge applies at a rate of 1% of the full Child Benefit award for each £200 of income between £60,000 and £80,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid.
Child Benefit claimants are able to elect not to receive Child Benefit if they or their partner do not wish to pay the charge.
Equalising income can help to reduce the charge for some families.
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Example |
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Phil and Jane have two children and receive £2,213 Child Benefit for 2024/25. Jane has little income. Phil expects his adjusted net income to be £70,000. On this basis the tax charge will be £1,107. This is calculated as £2,213 x 50% (£70,000 - £60,000 = £10,000/£200 x 1%). If Phil can reduce his income by £10,000 to £60,000 no charge would arise. This could be achieved by transferring investments to Jane or by making additional pension or Gift Aid payments. |
The scheme is available to families where all parents are working (on an employed or self-employed basis) 16 hours a week and meet a minimum income level with each earning less than £100,000 a year. Parents who are receiving support through Tax Credits or the Universal Credit are not eligible.
Parents need to register with the government and open an online account. The government ‘top up’ payments into this account at a rate of 20p for every 80p that families pay in. The scheme is limited to £10,000 per child per year. The government’s contribution is therefore a maximum of £2,000 per child.
Employer Supported Childcare (see the Tax and the Employee section) closed to new claimants in 2018. Parents who qualify for both schemes are able to choose which scheme they wish to use but families cannot benefit from both schemes at the same time. To find out about all childcare options visit www.childcarechoices.gov.uk
It still pays to equalise income as much as possible, as income tax will be minimised. However, transfers of assets may be liable to CGT and, if substantial, could also lead to an inheritance tax liability. It is vital for unmarried couples to each make a Will if they wish to benefit from each other’s estate at death.
Remember all the special rules for married couples, both those dealt with in this section and those covered in other sections of this guide apply equally to same-sex couples who have entered into a registered civil partnership or marriage.
Transferring assets or interests in a business between husband and wife may attract the interest of HMRC especially where it is obvious that it has been done primarily for tax saving purposes. Transfer of ownership of an asset must be real and complete, with no right of return and no right to the income on the asset given up.
If a non-working spouse is given shares in an otherwise one-person, private company, HMRC may, in some circumstances, seek to tax the working spouse on all of the dividends under what is known as the ‘settlements legislation’. So you may want to consider obtaining advice from us before entering into this type of arrangement.
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Checklist for Couples |
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Try to equalise your income. Consider placing assets in joint names. If you have children consider making use of their personal allowances. |