Four individual allowances you and your spouse could combine to help reduce tax

Article written by Kellands Hale, our preferred independent advice firm.

This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfactscompare.co.uk does not endorse the content.

Managing your wealth as a couple over the long-term comes with both challenges and upsides.
As you get to know each other over the years, you may become increasingly accustomed to each other’s financial goals and habits, helping you to form a succinct financial plan that suits you both.

Unfortunately, increasing financial pressures during the pandemic and cost of living crisis may have increased wealth-related conflict among couples. A survey by Aviva, published in February 2023, reveals that 26% of couples argue about money every week, and 5% say they disagree about financial issues every day.

This doesn’t have to be the case, though. In fact, having a spouse with whom you can combine your financial journey can have significant advantages – particularly when it comes to tax.

So, rather than becoming bogged down with the negatives, keep reading to find out four key aspects of your finances that you and your spouse could use together to reduce tax.

Your pension may be one of the most valuable assets to your name and, when you combine your pension wealth with that of your spouse, you may realise that you have plenty to support yourselves in retirement.

Moreover, if you’d like to continue growing your pensions in line with your long-term goals, you can pay into each other’s pensions while reducing your tax liability in some cases.

When it comes to paying into your partner or spouse’s pension, the rules are as follows:

• If your partner does not have an income, you can pay £2,880 into their pension every year (topped up to £3,600 by Government tax relief).

• If you’re both earning, you can contribute up to the Annual Allowance amount into their pot, as well as into your own. In the 2023/24 tax year, the Annual Allowance is usually £60,000 or their total earnings, whichever is lower. Your Annual Allowance may be reduced if your earnings surpass £260,000 as of 2023/24.

There are a number of advantages to paying into your partner’s pension, particularly when it comes to tax.

For instance, if your spouse works part-time, they are very unlikely to maximise their Annual Allowance in any given tax year. On the other hand, if you work full-time and have paid the full Annual Allowance into your own pension, you can then keep making tax-relievable contributions into your partner’s pension. Tax relief is paid at your partner’s marginal rate of Income Tax.

Plus, you can carry forward any unused Annual Allowance from the past three tax years, subject to meeting the qualifying criteria, and that you have sufficient earnings to reclaim the tax reliefs.

With all this to consider, you may wish to re-evaluate the way you pay into your pensions as individuals, and instead begin approaching your retirement funds as a team.

The Personal Allowance has stood at £12,570 since the 2021/22 tax year, and is set to be frozen at this limit until 2026. It marks how much a person can usually earn without paying Income Tax or National Insurance contributions (NICs) in that tax year.

Crucially, if your earnings were to increase while the Personal Allowance remains fixed, a larger portion of your income would then be subject to Income Tax and NICs.

If you’re married or in a civil partnership, utilising the Marriage Allowance could be constructive here.

The Marriage Allowance lets you transfer up to £1,260 of your Personal Allowance to your spouse or civil partner, or the other way around. You can use the Marriage Allowance if:

• One person in the partnership has earnings below the £12,570 threshold
• The other person pays basic-rate Income Tax.

This may reduce your Income Tax bill by up to £252 in that tax year.

While a seemingly small saving in the grand scheme of things, doing this each year (for instance if your spouse does not have earnings or they consistently earn less than the Personal Allowance) could help you make continued Income Tax savings together.

Even if you can’t benefit from the Marriage Allowance, such as if you’re a higher- or additional-rate taxpayer, your younger adult children could find it useful.

You can normally backdate any unused Marriage Allowance as far back as 2019.

Capital Gains Tax (CGT) is often levied on profits earned from the sale of personal belongings and assets, including:

• Business assets
• Shares and other non-ISA investments
• Your second home, or other properties you own that aren’t your main residence
• Your main residence if you’ve let it out or it is very large
• Personal assets worth more than £6,000, with the exception of your car.

Fortunately, there is an “Annual Exempt Amount” under which individuals are not liable to pay CGT. And, when it comes to shared assets, you and your spouse can use both your individual Annual Exempt Amounts to make even more efficient savings.

In the 2023/24 tax year, the CGT Annual Exempt Amount stands at £6,000, down from £12,300 in 2022/23. And, in April 2024, the amount is set to decline again to £3,000.

So, remembering that you can use both your individual Annual Exempt Amounts could mean you effectively double the tax break you receive on the sale of certain assets, including some shares, property, and business holdings. You can’t carry forward any unused Annual Exempt Amounts from previous years.

Offering wealth to family members over the course of your life can have a number of perks.

Firstly, your family can benefit from some of your hard-earned wealth now, rather than receiving a single influx of capital when you pass away.

What’s more, these gifts could reduce the value of your estate gradually, meaning that your beneficiaries could pay less Inheritance Tax (IHT) later on.

However, there is an annual exemption in place that limits how much you can give away without potentially incurring an IHT bill later. If you give more than the annual exemption, and die fewer than seven years after the financial gift is made, the money could still count as part of your estate for IHT purposes.

As such, it could be helpful to know how much you can give away tax-efficiently as a married couple.

As of the 2023/24 tax year, your individual annual exemption is £3,000. So, together you can give away £6,000 a year – and if you gave nothing in the previous tax year, you can backdate your annual exemption by one year too.

With all this in mind, if you’re set to live comfortably throughout your later life, it may be worth considering giving away a sum to your children and grandchildren each tax year.

Giving away up to £6,000 a year as a couple, split among however many recipients you choose, could help reduce the amount that is subject to IHT in the years to come.

As you’ve read throughout this article, there are ample tax benefits to approaching saving and investing as a couple. Even if you earn vastly different sums, utilising each person’s tax-efficient allowances to the best of your ability may reduce the tax you collectively pay over the years.

On top of these perks, one potential benefit that many people ignore is that drawing from two equally viable saving and investing pots, rather than one, could also be more tax-efficient.

For instance, drawing from two £500,000 pension pots, as opposed to one £1 million pension pot, could decrease the effective rate of tax you pay as a couple. Taking half your collective income from each person’s pension each year may mean that your later-life income remains in a lower tax band, as these withdrawals will be taxed on an individual basis.

In theory, the same applies to liquidating investments and selling other assets too – if your assets are split equally, each person is likely to pay less tax than if all your holdings came under one name.

Work with a Kellands financial planner to help make the most of your finances as a couple

If you’re married or in a civil partnership, and you wish to make the most of the tax efficiencies that come with this union, get in touch with us today.

We can help you assess your current financial circumstances, and offer bespoke guidance that suits your needs and goals for the future.

To get started, email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.