The amounts of income you might wish to consider switching will vary according to your personal circumstances. Here are the basic rules:
- The personal allowance for 2009/10 is £6,475, so ideally you will wish to ensure that is fully utilised.
- Remember that tax credits are not repayable on dividends, so dividend income cannot be used to cover personal allowances, although it can be used to transfer income from a higher rate taxpayer (who will bear an extra 25% on it) to a basic rate taxpayer, who will have no extra tax liability.
- If you are 65 or over your personal allowance is £9,490 (£9,640 for 75 and over). However, this allowance reduces to the normal personal allowance if your income is over £22,900, by withdrawing £1 of additional allowances for each £2 of income over the limit. This means that taxpayers in this position suffer a marginal rate of 30% tax on income between £22,900 and £28,930 (£29,230 for 75 and over). Transferring income to the partner in this band is therefore particularly useful.
- Taxpayers entitled to age related personal allowances can also reduce their income for the abatement calculation by making donations to charity or making contributions to a pension. Small donations to charity during the year can mount up, and many taxpayers overlook the importance of reporting them on the tax return. Keep a record of all charitable donations you make to ensure that you receive full benefit for them. If paying into a pension, gross contributions of up to £3,600 can be paid in any year in which you have no earnings – £2,880 net. In addition to potentially saving tax at 30%, the pension benefits can be drawn immediately by taking a 25% tax free lump sum.
Tags: Income tax allowances, Pension Benefits, Pensions, Personal allowances
