Tax & Accounting News

Income Shifting To Dodge The New Top Tax Rate

13/07/2009

In less than a year, the new top rate of tax of 50% is set to be introduced for those earning above £150,000 and many high earners will be looking at reducing their tax bill by shifting some income to their spouse or partner.

In fact, it is not just those earning above the headline rate who could benefit from this course of action, as the withdrawal in tax-free allowances for those earning over £100,000 mean those earning between £100,000 and £113,000 pay an effective tax rate of 60%, dropping back to 45% between £113,000 to £150,000.

Gifting income-producing assets to a spouse, civil partner or unmarried partner may seem the obvious solution, but there are pitfalls. For one thing, there is little point in transferring assets if the recipient has income over or approaching £100,000. At the other end of the scale, if the receiving partner’s income is below their personal tax-free allowance of £6,500, transferring assets which either have no tax or only basic rate tax deducted from the income they generate – such as bank accounts and government and other company stocks and bonds – makes sense, but transferring shares does not as the tax treated as being paid on dividends cannot be reclaimed.

Shifting assets to children to save on income tax is also not generally an option if they are under 18 and unmarried, because anti-avoidance rules mean any income the assets produce will still be treated as belonging to the previous owner for tax purposes.

There is no need to wait until next year to begin transferring assets – there are savings to be made even now, particularly if one partner is a 40 per cent tax payer and the other is not. For more information on making such tax arrangements, please contact us.