Tax planning for families
Family tax planning is a smart way to utilise all of the exemptions and allowances legally afforded to you.
In the UK, every individual has a personal tax-free allowance and is taxed independently. This applies to working parents, retired grandparents and also children. Because of this tax structure, it is possible to use legitimate means to reduce the joint size of your family’s tax bill.
Strategic (but non-aggressive) family tax planning can benefit contractors, small business owners, and even working adults. If you plan to undertake some form of family tax planning, however small it may be, we advise you to speak with a qualified and independent accountant first, whether it is our team at Tax Agility or an equally experienced professional. To give you an idea about family tax planning, we aim to discuss family tax planning in detail and highlight essential areas in this article.
What is family tax planning?
Family tax planning is a tax strategy, which maximises the usage of the many tax exemptions and tax allowances that exist within the legal framework for members of a family household. Often this happens through the careful shifting of income from the hands of the primary wage earner to their spouse or children.
The rationale that dictates this strategy is that anyone who does not earn as much as the primary earner of a household will be taxed at a lower tax band. Therefore, the maximum amount of taxable income that can be legally transferred to another family member should be utilised to minimise taxes and maximise household income.
Every person in a household is entitled to an annual personal allowance (or PA) on any income. A personal allowance is a threshold above which income tax is levied on an individual’s income. The personal allowance for tax year 2019/20 is £12,500 for individuals earning less than £100,000 a year. Once the £12,500 threshold is hit during the tax year, that person has to start paying taxes on any income they earn that is above that amount.
For example, if you earn £10,000 in the 2019/20 tax year, you do not have to pay any tax for that year. But if you earn £200,000 in the same year, you will lose your personal allowance and pay a higher tax rate on the vast majority of your income.
Examples of family tax planning strategies
Finding ways to spread income across various members of a household is the key to minimising the amount of tax which your family will pay in a year, and maximising how much income is tax-free or paid to a lower tax band. This can be done in a variety of ways – however, these strategies must be approached with proper regard for rules and regulations.
Make your family members shareholders
A highly popular approach among company directors when it comes to lowering tax bills is to make your spouse or a family member a shareholder in your company. This arrangement allows them to receive dividend payments instead of salary; and because dividend is taxed on a lower rate than salary, the overall tax bill is reduced accordingly.
Putting your family members on payroll
If your business has a legitimate need, like you need a weekend driver to take care of deliveries and your son is free, you can employ him and pay him commercially viable wages. The payment to your son is a tax-deductible expense in your company accounts. Follow the link to the article “Does HMRC object to putting family members on the payroll” if you would like to know more.
Marriage allowance
One legitimate strategy is to make use of marriage allowance, which allows an individual who earns less than £12,500 a year to transfer £1,250 of their personal allowance to their spouse or partner. By doing just that, you can immediately reduce your tax bill up to £250. To qualify:
- You must be married or in a civil partnership
- The lesser earner receives an income which is below the personal allowance threshold, i.e. £12,500
- The spouse or partner earns between £12,501 and £50,000 and pays income tax at the basic rate
Junior ISA
In theory, you can give as much as you like to your children if they are below 18 years old. But if they put the money in the bank and earn interest, then they can only earn up to £100 in interest. To get around this, you can consider making use of a Junior ISA.
A Junior ISA does not have the £100 interest limit, and the account holder does not pay tax on interest on the cash they save (for cash Junior ISA), or the account holder does not pay tax on any capital growth or dividends they receive (for stocks and shares Junior ISA).
At present, you can contribute £4,368 a year to a Junior ISA account. The amount you can contribute is usually increased every year, meaning by the time your child reaches 18, they are likely to have a substantial amount of savings in their Junior ISA account for which they do not have to pay tax on interest earned.
Inheritance tax
When it comes to inheritance tax, how much can you give to your children tax-free is one of the questions we are asked regularly. The answer lies in how well you plan.
You can give your children £3,000 worth of gifts a year tax-free as long as the gift takes place seven years before your death. This is known as annual exemption. If the years between gift and death is less than seven years, a tiered-tax system applies. Visit this HMRC page if you would like more information.
When you pass, the first £325,000 of what you own is not taxed. But anything above this amount is subject to 40% inheritance tax. The threshold is increased to £475,000 if you give away your home to your children or grandchildren.
Often you will see an oversimplified example using a house that you own to illustrate inheritance tax. In reality, your estate is likely to include more than a house. If you are a small business owner, any ownership of a business, or share you own in a business, is considered your estate and is subject to inheritance tax. But – here is the bit that requires some planning – your family members can benefit from Business Relief (either 50% or 100%) on some assets (property, building, machinery and unlisted shares) in your estate which you pass on to them either when you are alive or as part of your will. If you would like to know more about inheritance tax and business relief, get in touch with us today by calling 020 8108 0090.
Capital Gains Tax
As the name suggests, Capital Gains Tax applies when you sell something that has increased in value. There are many ways to lower your capital gains tax legitimately, including making use of annual exemptions, making gains through an ISA, pension and investment bonds, transferring the asset to your spouse, switching asset class, reducing your taxable income, and investing in small companies to name but a few. As there is no one-size-fits-all approach, it is best that you talk to one of our experienced chartered accountants first.
Planning for the future
Family tax planning is an excellent method of ensuring that you, your partner and your children will benefit from the many allowances and exemptions that are available in both the short-term and the long-term – including contingency plans that will protect your family in the event that something happens to you.
However, in order to fully utilise the breadth of opportunities available as part of a family tax planning strategy, such strategies should not be approached without the advice of a professional who has experience in tax planning for families. At Tax Agility, our team of experienced chartered accountants can work with you to navigate the complicated world of tax planning, help you to explore the available options, and ensure that you have the best strategy in place for your family.
In order for us to implement the most effective strategy for your family, we need to understand your financial position first. For this reason, we offer our first consultation free of charge to allow us to learn about your family’s financial circumstances and create an effective accounting solution.
Simply get in touch on 020 8108 0090 or contact us via our Online Form today, so that we can create a strategic family tax planning guide to suit your needs.
This article was first published in 2014 and has been updated on 14/08/19.
If you found this helpful, take a look at:
- Everything you need to know about corporate tax
- Tax Planning and your Personal Allowance
- Accounting tips for small businesses
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.
Childcare Vouchers for Directors
If you’re a director of a Limited Company and a parent or step-parent of a child whose expense is maintained by yourself, or you have parental responsibility for a child who lives with you, you may be able to save money by way of the Childcare Voucher Scheme.
For a company director to be eligible for the Childcare Voucher Scheme you must be both an employer and an employee of your company, meaning you take a salary from your role as well as receive remuneration through company shares. The scheme is not available to self-employed individuals or contractors.
Recent changes to Childcare Vouchers
The Childcare Voucher Scheme was initially due to be phased out in April 2018 and replaced with the new Tax-Free Childcare Scheme, but the deadline for new applicants has been extended to 4 October 2018. This means that from the date of this post, you have exactly one month to sign up for childcare vouchers if you are not already using them.
If you’ve already joined the scheme, you can keep getting vouchers as a Director, as long as you do it through the same employer and you don’t take an unpaid career break of over a year. If you successfully apply for Tax-Free Childcare you can’t continue using vouchers or re-join the voucher scheme, so now is the time to consider the relative benefits of each option and work out what will be best for you and your family.
How to Implement Childcare Vouchers for Directors
Firstly, you must check that your childcare provider, au pair, or after school club (in certain circumstances) is registered with Ofsted.
Next, you must contact HMRC or an independent scheme administrator to register for the Childcare Voucher Scheme. Handing this over to a third party will result in you having to pay a commission to your scheme administrator, though you should be able to put this down as a reasonable business expense.
You must also contact your accountant to let them know of the changes.
Keep in mind that if both you and the child’s other parent live with or have parental responsibility (or both) over a child, and you’re both directors of your Limited Company, you may both claim under the Childcare Voucher Scheme, doubling your potential household savings.
As a company director, you may receive childcare vouchers under the scheme even if you don’t take a salary from your role within the company. In this case, the vouchers will be seen as a tax-free employee benefit. If you do receive a salary as an employee of your company, however, you must ensure that your salary sacrifice (see below) doesn’t reduce your salary below the National Minimum Wage (NMW).
Your Savings
Here’s the crux. As a director-employee of a company there are two ways for you to receive childcare vouchers; via your employee payroll as a salary sacrifice (whereby the value of the vouchers is taken out of your salary, meaning you’ll save through reduced tax) or by treating them as a business expense, deducting them from your company profits.
To ease the pain of making this decision the Government provides a childcare voucher calculator online to help you determine how much better off you would be under both options.
In terms of the former, employee childcare vouchers are worth the following tax and National Insurance exemptions a week (regardless of your director status):
- £55 a week (£243 a month) for basic rate taxpayers
- £28 a week (£124 a month) for higher rate taxpayers
- £22 a week (£97 a month) for additional rate taxpayers
If you’ve been in the scheme since before 6 April 2011 you should be receiving the full basic rate exemptions, even if you pay tax at a higher rate.
From your perspective as a director, not only will opening your company up to the Childcare Voucher Scheme allow you to benefit from childcare vouchers by way of beneficial tax and National Insurance exemptions, if any of your employees choose to receive vouchers in exchange for part of their salary (salary sacrifice) this lowers the National Insurance Contributions (NICs) you have to pay on their behalf due to childcare vouchers being exempt from NICs.
Experienced Support with Childcare Vouchers
To speak with a professional to discuss the use of the Childcare Voucher Scheme in your Limited Company and how to implement childcare vouchers for Directors, or to discuss other childcare schemes, contact Tax Agility today on 020 8780 2349 or use our Online Form to arrange a complimentary, no obligation meeting.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.
Parental Trusts for Children
There’s a common misconception that parental trusts for children are a separate type of trust in their own right.
This is not the case, though there are some notable differences between standard examples of the following trusts and those that are set up by parents for their own children under eighteen who have never been married or in a civil partnership.
Parental Trust Income Deemed as Settlor Income
For each of the below trusts, if all assets in a child’s trust equate to less than £100 per parent then the child’s trust income doesn’t count as the settlor’s income for income tax purposes.
For trusts that produce over this amount the entirety of the child’s income from the trust is deemed to be the settlor (parent’s) income for income tax purposes. In most cases the trustees pay the income tax on income from the trust by filling out a Trust and Estate Tax Return, then they give the settlor a statement containing all the income paid and the rates of tax charged on it (for a detailed definition of trustees and their responsibilities, see our recent article on the topic). The settlor is then required to account for the amount of tax the trustees have paid on their behalf through their Self Assessment tax return.
Types of Parental Trusts for Children
Parental trusts for children under eighteen who have never been married or in a civil partnership will be either a:
Bare Trust
Though not their primary function, as with all the trusts here, bare trusts are commonly used to pass money and assets down to children under eighteen. While the assets within a bare trust are held in the name of a trustee, the beneficiary (the child) has the right to access all capital and income from the trust once they turn eighteen.
Interest in Possession Trust
Different from bare trusts, except for the standard prerequisite that no child under eighteen can receive any income or assets from the trust until they reach the age of eighteen, an interest in possession trust differs in that once the child reaches this age the trustee must pass on all income from the trust to the beneficiary (child) as it accumulates.
Accumulation Trust
Accumulation trusts allow the trustee to accumulate income inside the trust and add this amount to the trust’s overall capital. It’s also possible, in most cases, for the trustee to pay income out of an accumulation trust in a similar fashion to discretionary trusts…
Discretionary Trust
Discretionary trusts for children allow the trustees to make decisions surrounding how the trust income (and occasionally the trust capital) is used. The trustees can decide on a number of things for the beneficiary (child), including what gets paid out, how often these payments are made, and which beneficiary to pay when, if there is more than one beneficiary.
Experienced Trust Accountants
To speak with a professional accountant to discuss which parental trust is right for you and your child, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
The Tax-Free Childcare Scheme
Announced by the Prime Minister and Deputy Prime Minister back in March 2014, the Tax-Free Childcare Scheme finally launches this autumn, a scheme designed to help millions of working parents across the United Kingdom tackle rising childcare costs.
The Government consulted with parents, childcare providers, employers, and other interested parties before announcing the scheme. Speaking on its necessity, the Prime Minister said, “Tax free childcare is an important part of our long-term economic plan. It will help millions of hard-pressed families with their childcare costs and provide financial security for the future.”
The new scheme is available to nearly two million households up and down the country for all children up to aged twelve, and children with disabilities up to aged seventeen, provided parents are in work, earning over an average of £50.00 a week (and under £150,000 per year). This low threshold makes it possible for parents working part-time jobs to also benefit.
Read more
The Most Tax Efficient Ways to Save for Your Children
If you’re a parent you’ll know how important it is to put some money aside for your children; whether with the intention of using it to help fund them going to university one day, or to start building a safety net for their future.
Problems arise when you start putting money aside and realise that certain tax laws mean a large portion of anything you save will be taken from your savings each year. For this reason, below we have detailed three of the most efficient ways to save for your children, both in the short term, and for their futures.
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Child Trust Funds to Junior ISA Transfer from 2015
It has been announced that the government is due to allow savings to be transferred from Child Trust Funds to Junior ISA from April 2015. This announcement has been expected for some time and speaking about the move, Chancellor of the Exchequer George Osborne said:
"The Government supports hardworking families who want to save for their children. So I’m delighted that, as a result of these changes, over 6 million children who currently have savings in a Child Trust Fund will be able to benefit from better returns and lower charges on those savings in the future."
Childcare Vouchers | Tax-Free Childcare scheme
As you may be aware, the Government has announced plans to launch a new Tax-free Childcare scheme in autumn 2015 which will eventually replace the existing Childcare Voucher scheme.
If you are a parent currently receiving Childcare Vouchers, you may be impacted by the changes proposed as the new Tax-Free Childcare scheme will limit access to the scheme based on income and is targeted to working families, where both parents work. One of the key changes is that the scheme will no longer be administered through Employers, enabling self-employed and lower income families to benefit going forward.
Read on for further information and to see whether this change may impact you.
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Child Benefit Penalty for Higher Earners
If you or your partner are a higher earner parent (classified as anyone earning in excess of £50’000 per annum) and have been receiving the child benefit this year – you could face a large Child Benefit Penalty if you do not register for Self Assessment by 5 October 2013.
Individuals who fail to register by this date may face a penalty of between 10% and 100% of the amount due, depending on if the failure was intentional.
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Changes to Child Benefit
The Government has decided to withdraw child benefit from high-income households. But rather than cancelling the payment to high earners, HMRC will impose a new Child Benefit Tax to recoup some or all of the benefit.
The new tax charge will be introduced from the 7th January, 2013.
Who is affected by the changes to Child Benefit?
You will have to pay the High Income Child Benefit Charge if:
- You (or your partner) have an individual income of over £50,000 a year
And
- You receive Child Benefit or get financial help from someone who claims Child Benefit for a child that lives with you.
This sounds straightforward enough, but there are a few things to bear in mind. By ‘partner’, HMRC means any person you are married to, any person you are in a civil partnership with, or any person you are living with as if you are married to or in a civil partnership with.
Also, it does not matter whether the child that is living with you is not your child – you will still have to pay the tax.
If it’s still unclear, the HMRC has an online tool to help you figure out whether you will be affected.
How much will you be taxed?
The amount of tax you are due to pay will depend on two factors: the amount of Child Benefit you receive and the level of your income.
If your income is £60,000 or more, then you will have to pay back all of the Child Benefit you receive.
If your income is £50,000 or more, then you will have to pay back 1% of the benefit for every £100 you earn above the £50,000 base level.
So for example, if you earn £57,000 then you will have to pay 70% of the Child Benefit you receive back to HMRC.
What do you need to do?
If the changes will affect you, then you need to decide whether you want to stop receiving the benefit.
If you decide to keep receiving the benefit, you will now have to register for Self Assessment and file a tax return every year.
To stop receiving Child Benefit (and thus avoid paying the tax charge) you will need to notify the Child Benefit Office.
Here's HMRC's FAQ pdf document which may be helpful.
Please do not hesitate to contact us if you would like more information and advice on the Changes to Child Benefit on 020 8780 2349.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstances.