Planning for yourself and your family

At Quarter we can advise on tax planning strategies for yourself and your family. We can help individuals in the Belfast area to realise their goals and maximise their personal wealth.

Personal allowance

Each individual is entitled to his or her own personal allowance (PA) of £12,570 for 2024/25. The PA reduces an individual’s taxable income. For those with income in excess of £100,000, the allowance is restricted.

After reducing income by the PA a series of rate bands are assigned first to your non-savings (this may include income from wages, self-employment, property income and pensions), then to your savings income, and finally to any dividend income.

Income tax rates for 2024/25

Non-savings income for English and Northern Irish taxpayers is taxable as follows:

Welsh taxpayers

The National Assembly for Wales has the right to vary the rates of income tax payable by Welsh taxpayers. The Welsh rate of income tax has been set at 10% and is added to the UK rates, which are each reduced by 10%. This means that for 2024/25, the tax payable by Welsh taxpayers continues to be the same as English and Northern Irish taxpayers.

Scottish taxpayers

However, the following rates and bands apply for Scottish taxpayers (on non-savings and non-dividend income):

Rates that apply across the UK

Savings income

The Personal Savings Allowance (PSA) applies to income such as bank and building society interest. The allowance applies for up to £1,000 of a basic rate taxpayer’s savings income, and up to £500 of a higher rate taxpayer’s savings income each year. The allowance is not available to additional rate taxpayers.

In addition to the PSA, some taxpayers benefit from the starting rate for savings, which taxes £5,000 of savings income at 0%. This is not available if the taxable non-savings income exceeds the starting rate band.

Dividend income

The Dividend Tax Allowance (DTA) is £500. The DTA does not change the amount of income that is brought into the income tax computation. Instead, it charges £500 of the dividend income at 0% tax – the dividend nil rate. Like the PSA, the DTA does not reduce total income for tax purposes, and dividends within the allowance still count towards the appropriate basic or higher rate bands. Dividends in excess of the DTA are taxed at 8.75% (BR); 33.75% (HR); and 39.35% (AR) for 2024/25.

Case Study

Rita has gross income of £56,000 (made up of £26,000 earnings, £5,000 of interest and UK dividends of £25,000). Her tax liability is £7,162.260.

	Earnings	Interest	Dividends
Income	26,000	5,000	25,000
Deduct: PA	-12,570
Taxable	13,430	5,000	25,000
Tax at:
0% on PSA / DTA	0	500	500
20% on	13,430	4,500
8.75% on			18,770
33.75% on			5,730
Total tax	£2,686	£900	£3,576.26
Total tax liability: £7,162,26

The ‘hidden’ 45% and 60% tax rates

The top rate of income tax, for those with taxable income in excess of £125,140, is 45% (39.35% for dividends). The PA is scaled back if ‘adjusted net income’ exceeds £100,000, being reduced by £1 for every £2 of income in excess of that limit. This means that an individual with total taxable income of £125,140 or more will not be entitled to any PA. This gives an effective tax rate on this slice of income of 60% – higher if you are a Scottish taxpayer. It may be possible to reduce your taxable income and retain your allowances if approached with due consideration, e.g. by making pension contributions or Gift Aid donations. Contact us now for advice on minimising the impact of the top tax rates.

Looking to the future

It is likely that you will have a range of different financial requirements and goals. You might be looking to maximise your wealth so that you can enjoy more of your hard-earned money now and during retirement. You may need to pay for your children’s education, or to help support ageing parents. As your accountants, we can suggest practical ways to help make your objectives become reality.

Using allowances and exemptions

Each individual within your family is taxed separately, and is entitled to his or her own allowances and exemptions. The personal allowance (PA) is set at £12,570 for 2024/25, while the capital gains tax (CGT) annual exemption is £3,000.

By using the available PAs and gains exemptions, a couple and their two children could have income and gains of at least £62,280 tax-free, and income up to £201,080 before paying any higher rate tax. Through careful tax planning, we can help you and your family to benefit from more of your wealth.

Your tax planning objectives should include taking advantage of tax-free opportunities; keeping marginal tax rates as low as possible; and maintaining a spread between income and capital.

The Marriage Allowance

Some married couples and civil partners are eligible for the Marriage Allowance, enabling spouses to transfer a fixed amount of their PA to their partner. The option 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 PA to the other partner (£1,260 for the 2024/25 tax year). For those couples where one person does not use all of their PA, the benefit will be up to £252 (20% of £1,260).

Transferring assets

Planning can be hindered by the potential for tax charges to arise when assets are moved between members of the family. Most gifts are potentially taxable as if they were disposals at market value, with a resulting exposure to CGT and inheritance tax (IHT). However, special rules govern the transfer of assets between spouses and civil partners. In many cases, for both CGT and IHT there is no tax charge, but there are some exceptions – please contact us for further advice. In addition, gifts must be outright to be effective for tax, and must not comprise a right only to income. Careful timing and advance discussion with us are essential.

High Income Child Benefit Charge

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 £80,000 will be equal to the amount of Child Benefit paid. Claimants may 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.

Case Study

Dave and Leanne have two children and receive £2,213 Child Benefit for 2024/25. Leanne has little income. Dave 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 Dave can reduce his income by a further £10,000 to £60,000 no charge would arise. This could be achieved by transferring investments to Leanne or by making additional pension or Gift Aid payments.

Cap on reliefs

There is a ‘cap’ on certain otherwise unlimited tax reliefs (excluding charitable donations) of the greater of £50,000 and 25% of your income. This cap applies to relief for trading losses and certain types of qualifying interest.

Giving your children a good start

Funding university degrees and saving up a deposit for a first home are increasingly expensive prospects, so the sooner you start planning, the better. All children have their own PA, so income up to £12,570 escapes tax this year, as long as it does not originate from parental gifts. If income from parental gifts exceeds £100 (gross), the parent is taxed on it, unless the child has reached 18, or has married. Parental gifts could be invested to produce tax-free income, or in a Cash or Stocks and Shares Junior Individual Savings Account (Junior ISA) to build a fund to help offset university expenses and minimise debts. The £100 limit does not apply to gifts into JISAs or National Savings Children’s Bonds.

Childcare scheme

The government’s Tax-Free Childcare (TFC) scheme operates via an online childcare account. Under the TFC scheme, relief is given at 20% of the costs of childcare, up to a total childcare cost of £10,000 per child per year. The scheme is worth a maximum of £2,000 per child (£4,000 for a disabled child). All children under 12 years old are eligible (or up to 17 for children with disabilities), but parents must meet certain eligibility criteria.

Generation skipping

If your child is grown up and financially secure, it may be worth ‘skipping’ a generation, as income from capital gifted by grandparents or more remote relatives will usually be taxed as the child’s, as will income distributions from a trust funded by such capital.

Marriage breakdown

Maintenance payments do not usually qualify for tax relief. The special CGT and IHT treatment for transfers between spouses applies for up to three years after the tax year in which separation occurs. For CGT, transfers in subsequent years are dealt with under the rules for disposals between connected persons, with the disposal treated as a sale at market value, which could result in substantial chargeable gains. For IHT, transfers remain exempt until the decree absolute. Timing is crucial; we can assist you.

A contingency plan

Contingency planning could help to protect your family if you die or become incapacitated. This might include taking out adequate insurance cover, perhaps with life assurance written into trust to ensure quick access to funds. It is also essential to make a Will. We also strongly recommend that you and your spouse:

• make a living Will (also called ‘advance decisions’): so that your wishes are clear with regard to medical treatment in the event that, for example, you were seriously injured following an accident
• execute a lasting power of attorney: so that if you become unable to manage your affairs as a result of an accident or illness, responsibility will pass to a person of your choosing.

Remember to tell your spouse, your parents and your business partners where your Will and related documents are kept. If you are passing on responsibility for managing your affairs, it might be advisable to talk matters through with them.

Unclaimed assets?

Billions of pounds of assets lie unclaimed in the UK! To see if you have lost assets contact the Unclaimed Assets Register on 0333 000 0182 or visit www.uar.co.uk (NB: a charge applies for this service). To find out if you have an unclaimed Premium Bond prize, call 08085 007 007 or visitwww.nsandi.com.

Non-UK domiciles

A UK resident and domiciled individual is taxed on worldwide income and gains. Non-UK domiciles who are UK resident can claim the remittance basis of taxation in respect of foreign income and gains, with the effect that they are only taxed if foreign income and gains are brought into the UK. They will however lose their entitlement to the personal allowance for income tax and the annual CGT exemption. There may also be a significant ‘remittance basis charge’ to pay. The non-UK domicile is also potentially favourably treated for IHT, as they only pay IHT in respect of UK assets, as opposed to their worldwide assets.

An individual who has been resident for at least 15 of the last 20 tax years will be deemed UK domiciled for all tax purposes. In addition, those who had a UK domicile at the date of their birth will revert to having a UK domicile for tax purposes whenever they are resident in the UK, even if, under general law, they have acquired a domicile in another country.

Note that the remittance basis of taxation will be abolished and replaced with a simpler residence-based regime from 6 April 2025.

Your next steps: contact us to discuss...

• Making the most of allowances and reliefs
• Ensuring that your tax liability is kept to a minimum within the law
• Using savings, capital and other vehicles to give your children a better start in life
• Writing a Will
• Life insurance and obtaining disability and critical illness insurance
• Tax-efficient savings and investments

If you are in the Belfast area and would like advice on personal and family tax planning strategies, please contact Quarter.