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Unlock Substantial Tax Savings with this Little-Known Couples’ Financial Strategy
Financial advisers have long been privy to a little-known tactic that could potentially save couples over £8,000 annually in taxes.
This strategy involves transferring savings between partners, leveraging online calculators to determine the optimal amount to shift from the higher-earning individual to the lower-earning partner. By executing this manoeuvre, one partner might completely eliminate their tax liability on savings interest, while the higher-earning spouse can significantly reduce their tax burden.
The significance of this switching technique has escalated in light of soaring interest rates, which have pushed more individuals into the realm of taxable savings. Even individuals with relatively modest savings could find themselves facing a tax bill. For instance, a higher-rate taxpayer with just £10,000 in savings at a 5% interest rate could be subject to taxation on their savings income.
What often goes unnoticed is that individuals with low incomes can benefit from three exemptions on savings interest. By strategically leveraging these exemptions, couples can save substantial amounts in taxes. This financial hack is proving invaluable for many, especially in today’s economic landscape where every saved pound counts.
Savings Strategies for Tax Relief
For couples navigating the complexities of taxation, there are strategic avenues that can lead to substantial savings. One such avenue is the little-known exemption called the ‘Starter Rate for Savings’. If one partner’s income falls below £17,570, they can benefit from this exemption, offering relief from tax on up to £5,000 of interest. The calculation of this tax-free band involves subtracting taxable non-savings income from £17,570. If the difference exceeds £5,000, the tax-free band remains at £5,000. Should the difference be less than £5,000, that becomes the tax-free band, where savings are entirely tax-free.
Furthermore, for individuals who fall below the personal tax allowance threshold of £12,570, the difference between this allowance and their income can be added to their tax-free savings allowances.
In addition to these exemptions, there’s the Savings Allowance. Basic rate taxpayers, at 20%, receive a £1,000 savings tax allowance, which exempts that amount of interest from income tax. High-rate taxpayers, at 40%, have a £500 allowance. However, for those in the top tax bracket, 45%, or individuals with income surpassing £125,140 annually, this allowance becomes zero.
By strategically utilising these allowances, which can be combined, couples with disparate incomes and significant savings can avoid paying tax on the interest earned, even on amounts exceeding £100,000. These methods serve as powerful tools in the realm of tax planning and financial optimisation.
If you’re unsure how to make the most of these strategies, our friendly and knowledgeable Tax Team are here to help on 01384 376 964
Folkes Worton LLP Chartered Accountants
Accounting for the Future
