Financial strategy

6 Ways Couples Can Combine and Optimise Their Finances

Many couples today prefer to keep their finances separate, often with good reason. But there are a number of ways in which joint finances, or at least joint planning, can help to save tax.

More importantly, financial cohesion and shared goals can lead to a more satisfying outcome for both partners.

So how can you combine and optimise your finances to improve your financial security as a couple?

Hold Cash Efficiently

While interest rates are pitifully low at the moment, if you hold large amounts of cash, you may need to pay tax on the interest.

Everyone in the UK has a Personal Savings Allowance. This is the amount of interest you can earn without paying tax. The allowances are:

  • £1,000 for basic rate taxpayers
  • £500 for higher rate taxpayers
  • £0 for additional rate taxpayers

The Personal Savings Allowance can also be used to offset income from fixed interest securities or gains made when encashing investment bonds. 

Additionally, if your income is less than £17,570 per year, no tax applies on interest of up to £5,000, providing this doesn’t take your income over the £17,570 threshold. 

Couples can maximise the allowances available by holding cash (or other interest-producing investments) jointly. It can also make sense for the lower-earning partner to hold more of the cash as they will receive greater benefit from the allowances.  

Claim Marriage Allowance

The Personal Allowance is the amount of income you can earn before paying tax. This is currently £12,570 for the 2021/2022 tax year.

Anyone earning less than £12,570 can pass some of their Personal Allowance to their spouse. For the current tax year, this is capped at £1,260, which can reduce the household tax bill by up to £252.

The Marriage Allowance is only available if the higher-earning partner is a basic rate taxpayer.

The allowance needs to be claimed by contacting HMRC. Claims can be backdated to 5th April 2017.

When you make a claim for Marriage Allowance, it will continue automatically until you cancel it, for example if your circumstances change.

Optimise Investments

When you hold shares or investment funds, these will usually generate an income in the form of dividends. This income is included within your tax calculation, whether it is paid out to you or reinvested to buy more shares. 

Everyone, regardless of income level or tax band, can receive up to £2,000 per year in dividend income without paying tax. This is in addition to the Personal Allowance and any other exemptions.

If you own a substantial investment portfolio, it can be worth allocating some of the capital to your partner so that you benefit from both dividend allowances. 

If you already hold your investments jointly, another option would be to allocate investments with a higher income yield to a lower earning spouse. This not only makes use of two dividend allowances, but can help to ensure that any income in excess of this is subject to a lower rate of tax.

Manage Capital Gains

When you dispose of an asset, you need to calculate the profit you have made. This is calculated as the sale price minus the acquisition cost, taking into account any fees or charges paid.

If the gain is over £12,300 (2021/2022 tax year) tax will apply on the excess. The rates are:

  • 10% on gains falling within the basic rate tax band (18% for property)
  • 20% on gains exceeding the basic rate tax band (28% for property)

If you give an asset away as a gift (other than to a charity), the market value will be used rather than the disposal proceeds. This means that a tax liability can apply even if you haven’t made any money from the asset.

An exception is transfers of assets between spouses. If you give an asset to your spouse, including shares, funds, or property, this is ignored for Capital Gains Tax (CGT) purposes and no tax bill applies. If your spouse subsequently sells the asset, the acquisition cost used in the CGT calculation will be the amount that you paid for it.

The main benefit of this is that when you transfer assets to a spouse, you have double the annual exemption to set against any gains. This means that you can jointly realise up to £24,600 before any tax becomes payable.

Make Use of Pensions

There are a number of ways in which pensions can be optimised for joint planning.

Anyone can contribute up to £3,600 per year to a pension. £720 of this gross contribution is credited in the form of tax relief, which means that the total contribution only costs £2,880 out of net income. 

Personal contributions are capped at the level of relevant UK earnings, or the Annual Allowance (£40,000) if this is lower. 

Higher earners or those who have taken a flexible income from their pension have a reduced Annual Allowance. 

If you have the capacity to pay more into a pension but your contributions are capped, it can be extremely efficient to pay contributions for your spouse instead. This has the following benefits:

  • They will receive tax relief on the contribution.
  • The funds will grow free of most taxes.
  • Your spouse can withdraw a tax-free lump sum of 25% when they reach the minimum retirement age.
  • If they have an income in retirement, this will make use of their Personal Allowance.

Pensions can be passed to a spouse, or any other beneficiary you choose, on death. This means that pensions are highly effective for estate planning as well as retirement planning.

Plan Your Legacy

Inheritance tax is a concern for many families, particularly as the nil rate band (£325,000) has been frozen for over a decade, while asset and property values have continued to grow.

To partially address this, the Residence Nil Rate Band (RNRB) has also been introduced. This effectively extends the nil rate band by up to £175,000, on the following conditions: 

  • It is used to offset the value of the main residence. 
  • The property must be passed to a direct descendant.
  • The relief is gradually revoked where the estate value is over £2 million.

Married couples have two nil rate bands, as well as two RNRBs, which means that up to £1 million can be passed on without Inheritance Tax.

Additionally, widows who have remarried can benefit from up to four nil rate bands with careful planning.

The joint nil rate band (£650,000) can also prove useful during your lifetime, as it doubles the amount that you can place in trust without being subject to an immediate tax charge. 

Lifetime gifts are immediate outside your estate if the value is under £3,000 per year. This can be carried forward by up to one tax year. This means that a couple can gift up to £12,000 in a single tax year if no previous gifts have been made.

Some of the options outlined in this guide are available to anyone, for example, allocating cash and investments between partners depending on tax rates. 

However, only married couples or civil partners can benefit from Marriage Allowance, CGT exemptions, or the joint nil rate band. Tax efficiency may not be the most romantic reason to propose, but it should certainly be a consideration.

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Joe Jackson

Helping people achieve their financial goals is an extremely rewarding experience. No two clients are the same, which means no two days are the same. It’s a really fast-paced industry, full of characters and personal interaction, and I absolutely love it.