For 2015/16 there are three rates of income tax – the basic rate of 20%, the higher rate of 40% and the additional rate of 45%.
By transferring income to a lower earning spouse or civil partner it is possible to save tax at the higher rates, thereby reducing the combined tax bill.
It should be noted that to transfer income to a spouse or civil partner, the underlying asset, such as shares, must be transferred, rather than the income (for example, the dividend) itself.
Stuart is an additional rate taxpayer with income of £170,000. His wife has income of £50,000 (after deducting personal allowances).
By transferring income of £20,000 to his wife, the marginal rate of tax is reduced from 45% to 40%, saving tax of £1,000 (5% of £20,000).
A word of caution: where it is not possible to reduce income below £100,000 for both partners to preserve personal allowances, care should be taken to avoid the high marginal rates that occur between the income limit and the level at which the personal allowance is fully abated (for 2015/16 between £100,000 and £121,200).
If Stuart’s wife had been a basic rate taxpayer, it is possible to generate greater savings and in this situation it is advisable, if possible, to transfer sufficient income to use the whole of her basic rate band. The basic rate band is set at £31,785 for 2015/16 and the personal allowance is £10,600 making it possible to have income of £42,385 before paying higher rate tax.