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HMRC’s record tax receipts in January 2023 prompted Richard Cooper, business development manager at the LIBF, to think about the significant role that paraplanners play in ensuring appropriate allowances and use of reliefs are being considered.
Here he highlights three common reliefs that are often overlooked.
Marriage allowance
HMRC recently issued a press release promoting the take up of the marriage allowance as a gift for Valentine’s Day. According to the press release, more than 2.1m couples currently benefit from it.
However, HMRC also estimates that thousands more couples are missing out because they don’t realise that they may be eligible – particularly couples where one partner has retired, given up work to take on caring responsibilities or is unable to work due to a long-term health condition.
The marriage allowance allows married couples or civil partners to transfer up to 10% of their personal tax allowances if one partner’s income is under their personal allowance of £12,570 and the other partner is a basic rate taxpayer.
This means couples can reduce the income tax they pay by up to £252 (ie, £1,260 x 20%).
They can also backdate the claim to include the four previous tax years if their situation allows.
If they made the first claim in 2023/24, they could go back to the 2019/2020 tax year – which means it could be worth up to £1,256 in tax relief.
Customers earning less than £12,570 a year can transfer up to £1,260 of their Personal Allowance to their higher-earning partner, to reduce the amount of tax they pay. They can backdate their claim to include any tax year up to 6 April 2018 – which could be worth up to £1,242 in tax relief.
It’s easy to find out what may be due – search ‘Marriage Allowance calculator’ on GOV.UK to get started. By ensuring customers apply on GOV.UK, rather than through a third party, they get to keep 100% of the tax relief due.
Pension contributions for non-earners
Another straightforward tax relief is tax relief on pensions.
Non-earners can make personal pension contributions so long as they are under 75 and resident in the UK.
Their contributions will receive 20% automatic tax relief, even if they pay no tax.
They can contribute up to £3,600 each year – a payment of £2,880 to which the government automatically adds £720.
This is a very tax-efficient way to invest for a non-earning spouse, child or anyone who’s already retired.
You can also build in a tax efficient way to take income if the amount withdrawn from the pension is less than the personal allowance.
Client example
David and Debra are married. David is 60 and is semi-retired but still earns £40,000 per annum. Debra is 58, has stopped working, and is not receiving any income.
She is due to start receiving her local government pension scheme at age 65. The pension payable will mean that she becomes a basic rate taxpayer after 65. They have already applied for the marriage allowance.
Debra could make a gross personal pension contribution of £3,600 of which £720 is paid by the government as tax relief – meaning the net contribution for Debra is £2,880.
She could contribute 7 years of contributions to a personal pension totalling £25,200 at a net cost of £20,160, with £5,040 gained from tax relief.
Assuming any growth accounted for charges and the personal pension was worth £25,200 she could take 25% tax free, which amounts to £6,300.
The remaining £18,900 would be potentially liable to income tax if taken as income.
However, she can withdraw this under flexible pension withdrawal rules over the two tax years before she started receiving her local government pension. £18,900 /2 = £9,450
Assuming she is still not working and has no other income, she will have unused personal allowances that cover the amount of pension income, and the full amount will not be liable to any income tax.
Gift aid and higher rate relief
Individuals who make contributions to charity under gift aid and pay higher or additional rate tax can claim the difference between the 40% and/or 45% and the basic rate of tax 20% on the total gross value of the donation.
Higher rate relief can be claimed through the self-assessment tax return or by asking HMRC to amend the tax code.
For example:
Consider a donation of £1,000. The total value of that donation to the charity is £1,250. The individual can therefore claim back:
- £250 – if the individual pays tax at 40% (£1,250 × 20%)
- £312.50 – if the individual pays tax at 45% (£1,250 × 25%)
For calculation purposes, relief is given by increasing the basic rate limit and the higher rate limit by the grossed-up amount of the gift.
Summary
Paraplanners do often spot when the reliefs outlined above, and others, are not being used. In doing so, they can add significant value to both the clients and advisers.
If it’s unclear whether clients have used all their reliefs and allowances, then it is always good practice to double check the situation with the adviser – they may have overlooked it.
