Each individual has a single person’s allowance which, if not utilised against that individual’s income, is lost. Married couples or registered partnerships should therefore try to ensure that each party receives at least enough income to cover his or her single person’s allowance which, for the year 2007/08 amounts to £5,225

After deduction of personal allowances each individual taxpayer pays income tax at the rate of 10% of the next slice of income - £2,230 for 2007/08. Basic rate tax (22%) is then paid on the next slice - £32,370 for 2007/08.

If one party to a marriage/partnership is paying tax at a higher rate than the other, so that there are therefore amounts of lower rate bands not being used by the other party, consideration could be given to transferring income to that person. This could be done by, for example, paying a salary from a business or profession, or by arranging transfer of ownership of assets between parties so that the income from those assets becomes that of the person with the lower tax rate.

It should be borne in mind that assets transferred become the legal property of the person to whom they are transferred. If assets are put into joint names, the income will be allocated equally between the parties unless an election to adopt a different allocation is submitted to the Inland Revenue. No charge to capital gains tax arises on a transfer of assets between parties to a marriage or civil partnership.

The married couples allowance no longer applies, except where the marriage existed at 5 April 2000 and one spouse was born before 6 April 1935.

Charitable donations made under Gift Aid are treated as made by the individual who makes the payment. These payments are eligible for tax relief at higher rates if relevant.

In the case of a married couple/civil partnership therefore, it should be ensured that any such payments are made by the spouse with the higher marginal rate of tax. Particular care should be taken to ensure that any such payments are not made by a person who is not liable to tax as the Inland Revenue may then raise an assessment on that person to recover tax deducted. The higher rate tax relief is given by making a specific claim on submission of the personal Income Tax Return for that year.

It is also possible to elect that donations made can be carried back to the previous year for tax purposes, which could keep/retain the 40% rate relief if income unexpectedly reduces.

Gifts to charities of quoted shares (or specific qualifying investments) are exempt from capital gains tax and in addition, the market value of the shares can be claimed by the donor, qualifying for tax relief at the taxpayers’ highest rate.

A taxpayer with a large built-in capital gain in a quoted security who wished to make a donation to a charity should therefore pass shares to the charity and thus obtain the tax benefits, rather than sell the shares and make a gift of cash.

Individuals are able to make payments into personal pension schemes up to the whole of their earnings in a year with an annual maximum of £225,000, until such time as the total value of all pension funds held is £1.6million. (These figures increase annually to reach £255,000 and £1.8million respectively by 2010/11)

Any individual, irrespective of amounts of earnings or income can make a contribution of up to £3,600 per annum into a personal pension scheme.

All payments of personal pension premiums are made under deduction of basic rate tax. Higher rate tax relief is given on completion of the submission of the personal Tax Return.

Parents and grandparents can invest £3,600 per annum in a pension on behalf of a minor. When the minor reaches the age of 18, the pension fund can then be used by that person as his/her own pension scheme providing a substantial start towards retirement planning and enabling the fund and be used for business and financial planning.

Professional advice should always be taken if payment of large sums for pension premiums are being considered.

If a taxpayer acquires shares in an unquoted trading company qualifying for relief under the Enterprise Investment Scheme, tax relief can be obtained at the rate of 20% on the sum invested up to an amount of £400,000, provided the appropriate conditions are satisfied.

These conditions include being ‘non-connected’ to the Company and holding a maximum of 30% of the Company’s shares. Provided the shares are held for three years no capital gains tax will be charged on any gain realised, although if a loss arises the loss can be claimed for capital gains purposes. This loss may be reduced by the value of the income tax relief received.

Capital gains can also be deferred if the gain is reinvested into shares qualifying for enterprise investment relief. The deferred gain becomes payable on the disposal of the EIS shares.

Subscribing for shares in a Venture Capital Trust (to a limit of £200,000) will give 30% income tax relief and tax free growth, provided the shares are held for three years.

An investment into an ISA can shelter both income and capital gains on the income and gains arising within the ISA. There are restrictions on the amounts which can be invested and assets which can be held in an ISA, depending on the type of ISA:-

a Maxi ISA: Must include an element of stocks and shares and may include up to £3,000 cash. The maximum amount which can be invested is £7,000.

b Mini ISA: Can be only cash, or stocks and shares, but cannot be a mixture of the categories. The maximum amount which can be invested is £3,000.
(note for 2008/09, these limits rise to £3,600 and £7,200 respectively)

It is not possible to invest in both a maxi ISA and a mini ISA in the same tax year, once an investment has been made into one of these in a tax year further investment will be restricted to that particular ISA up to the maximum for that type of ISA for that year.

If the relevant allowance for investment into an ISA is not used in any one tax year it cannot be carried forward to a following tax year and the opportunity to use that allowance is lost.

Taxpayers over the age of 65 are entitled to increased personal allowance of £7,550 (£7,690 if aged over 75). However, to the extent that the taxpayer’s income exceeds £20,900 the allowance is reduced by £1 for each £2 excess income.

Couples over 65, therefore, whose combined incomes exceed £7,690 but do not exceed £41,800 should try to arrange that their income is divided as equally as possible so that both parties can have the full benefit of the age allowance.

Two tax credit schemes currently exist:-

1 Child tax credit
2 Working tax credit

You will be entitled to child tax credit if your income (you and your partner’s income if appropriate) is up to £58,175 per year; £66,350 per year if you have a child who is less than a year old.

There is also an element of credit designed to assist with the costs of child care. The maximum rate of child care is 80% of cost up to £300 per week or £175 per week if only one child. To qualify for the child care element of working tax credit, lone parents must work 16 hours per week or more and couples can claim if both work 16 hours per week or more, or one works 16 hours per week or more and the other is treated as incapacitated because he/she meets the conditions for incapacity, eg disability living allowance, incapacity benefit, etc. Please note, the child must be cared for by a registered childminder, nursery, or play scheme.

Forms on which to notify entitlement should have been issued by the Inland Revenue to employed individuals, but taxpayers who believe they should be entitled to the credit and have not received the forms should take steps to contact the Inland Revenue urgently to notify eligibility for the credit on this number: 0845 300 3900.

The basis year for assessing income for claims for the year 2007/08 is the year ended 5 April 2007.

It is vital that the appropriate claim form TC600 is submitted by 31 August 2008, because if the form is received by the Inland Revenue late, the payment will not be backdated.

Taxpayers with family incomes exceeding £58,000 should consider lodging a protective claim for credits if there is a possibility that at the end of the year 2008/09 the family income will have reduced to below that figure as claims lodged after 5 July 2008 can only be backdated three months, leading to a potential loss of part of the credit.

Once entitlement to these tax credits have been established, the Inland Revenue will continue to pay credits at the agreed rate for two years and there is no requirement to notify the Inland Revenue of changes in income unless the change is in excess of £25,000.

It is therefore possible to establish a claim to tax credit by payment of a one-off tax allowable sum, e.g. pension payment, Gift Aid payment or for self-employed purchase of a car attracting 100% capital allowances (see 4.1 below) and then receive credits for two years based on this lower income. Each case needs to be considered individually and we will advise further on request.

Significant tax savings can be obtained through small companies using a combination of salary and dividend to controlling shareholders. The salary should be set as a minimum at the rate to give entitlement to national insurance benefits (for the year 2007/08 - £5,200). Payment of a dividend to absorb available profits after remuneration will not give rise to any further liability on an individual who is only liable to basic rate tax and a liability of only 25% of the net distribution to the extent that the distribution is chargeable to higher rate tax.

If both parties to a marriage/civil partnership are shareholders and it is proposed to adopt a policy of low salary plus dividend, or to split the income in any way between the partners, professional advice should be taken to check on the possibility of the Inland Revenue attempting to invoke (proposed new legislation) and treating the whole of the income as being taxable on the primary income producer.

Non-Domiciled Individuals and UK Residence Rules

Although it will not affect 2007/08 income tax liabilities, we want to use this memorandum to draw attention to the changes affecting individuals claiming to be non-domiciled in the UK for income tax and also the method of determining residence in the UK. Please note, final legislation is still not on the statute book.

1.10.2 Currently individuals claiming to be non-domiciled only pay UK income tax on income arising in the UK, or remitted here from overseas sources. As from 6 April 2008 individuals who are long term (more than seven years) resident but not domiciled in the UK who do not wish to pay UK tax on the unremitted overseas income will be subject to a flat rate charge of £30,000. There is a de minimus relief of £1,000 and individuals making a UK Return including all their worldwide income will pay tax on the liability disclosed from that Return and will not be liable to the flat rate charge.

1.10.3 Individuals who have claimed to be non-resident in the UK based on the number of days spent in the UK will, as from 6 April 2008, be required to count day of arrival and departure as constituting days spent in the UK, whereas up until now those days have been excluded from this calculation.

We hope you find the above of interest and as indicated earlier, will be pleased to advise you further on any specific points.

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