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Family tax planning is a smart strategy for utilizing all the available exemptions and allowances within the legal framework.

In the UK, each individual has a personal tax-free allowance and is taxed independently, regardless of being a working parent, retired grandparent, or child. This tax structure allows for legitimate methods to reduce the overall tax burden for the entire family.

Strategic family tax planning, which is both non-aggressive and within the confines of the law, can benefit contractors, small business owners, and working adults. If you are considering family tax planning, no matter how small, it is advisable to consult a qualified and independent accountant first, such as the team at HMA Accountants or another experienced professional. In this article, we aim to delve into the details of family tax planning and highlight essential areas to consider.

What is family tax planning? Family tax planning involves utilizing various tax exemptions and allowances available to members of a family household within the legal framework. This often involves strategically shifting income from the primary wage earner to their spouse or children.

The underlying principle behind this strategy is that individuals who earn less than the primary earner in a household fall into lower tax brackets. Therefore, maximizing the amount of taxable income that can be legally transferred to another family member helps minimize taxes and maximize household income.

Every member of a household is entitled to an annual personal allowance on their income. The personal allowance sets the threshold above which income tax is levied. For the tax year 2019/20, the personal allowance is £12,500 for individuals earning less than £100,000 annually. Once an individual’s income exceeds the £12,500 threshold, income tax is applied to the amount above that limit.

For example, if someone earns £10,000 during the tax year 2019/20, they won’t have to pay any taxes for that year. However, if they earn £200,000 in the same year, they will lose their personal allowance and pay a higher tax rate on the majority of their income.

Examples of family tax planning strategies The key to minimizing the overall tax liability for your family is to find ways to distribute income among various household members, ensuring that income is either tax-free or subject to lower tax rates. There are several strategies to achieve this, but it is important to adhere to the rules and regulations.

  1. Making family members shareholders: A common approach among company directors is to make a spouse or family member a shareholder in the company. By doing so, they can receive dividend payments instead of salary, resulting in lower overall tax liability due to the lower tax rates applied to dividends.

  2. Employing family members: If there is a legitimate need within your business, such as hiring a family member for specific tasks, you can employ them and pay them a commercially viable wage. The payment made to the family member is a tax-deductible expense for the company.

  3. Utilizing marriage allowance: One legitimate strategy is to take advantage of the marriage allowance, which allows an individual earning less than £12,500 per year to transfer £1,250 of their personal allowance to their spouse or partner. This can reduce the overall tax liability by up to £250.

  4. Junior ISA: A Junior ISA is an effective way to save and invest money for children under the age of 18. Contributions to a Junior ISA are not subject to the £100 interest limit imposed on regular savings accounts, and the account holder does not pay tax on the interest earned or capital growth received.

  5. Inheritance tax planning: Careful planning can help minimize the impact of inheritance tax. Annual exemptions allow tax-free gifts of up to £3,000 per year, provided they are made seven years before your death. Utilizing Business Relief can also provide tax benefits for passing on certain assets