We have heard that every penny counts, as pennies certainly make pounds but how about 1,250,000 pennies? That is a whole lot of pennies and I am sure they do definitely count, although it will take a considerable amount to count 1,250,000 pennies.
Today I will tell you how to save £12,500 in taxes or shall I say 1,250,000 pennies?
If your income exceeds £125,000, you lose your entire personal allowance, which is a potential tax loss of £5000.
Now the question is how to retain your personal allowance to save £5000? I can write a whole lot of tax gibberish or explain you with an example?
I would rather go for an example…..
Let’s assume that you have an adjusted net income of £130,000, out of which £30,000 is interest earned from investments. Your spouse does not work and therefore have no income. If you choose to transfer the investments to your wife, your income will be reduced to £100,000 which will allow you to retain your personal allowance and therefore a saving of £5000.
Don’t forget that if you choose to retain the £30,000, not only you will lose the personal allowance but you will also pay tax on £30,000 at 40%. This means a total loss of £14,704 (explained below in the example).
Lets crunch some numbers, shall we?
Option 1 – Retain £30,000 and pay tax at £130,000
Tax liability – £45,500
Option 2 – Transfer £30,000 to your wife
Your tax liability – £27,496
Your wife Tax liability – £3300
Total Tax liability in option 2 – £30,796
Tax savings – £14,704