It's that time of the year when the kids are about to break up for the holidays - which means that the bank of mum and dad is set for an assault yet again!
Whether it is activities during the school holidays, childcare, tuition fees and related university living costs or private school fees needing to be paid, there is a way to make the paying of these a little less painful.
You see, the tax-free earning allowance (currently £11,500) applies to everyone from birth. This means you if you can find a way to use your children's allowances to fund their own expenses - rather than paying out of your taxed income - you could save up to 45% of whatever amount you can get into your child's name. This is based on the highest rate of tax you would pay on your income. If you mainly take your drawings via dividends then your saving would be 38% - being the top rate of tax on dividends.
The allowance got even better when the tax free dividend allowance was introduced - currently £2,000. So you potentially have £13,500 of tax free income you can extract PER CHILD. So how do you do this?
The answer is the discretionary trust.
Get some advice to help you route some of your company shares to a trust set up for the benefit of your children. There is some anti-avoidance legislation which you need to watch out for but there are work-arounds if your circumstances fit. Generally this planning applies mainly for business owners but if you are employed and have your own parents who might be looking to pass some of their surplus assets to you at some point, then you could potentially benefit too.
Once the shares are in the Trust then whenever the company votes a dividend (or rent is received if the Trust owns a property), the trust receives its proportion - which can be treated as income for the children. And this is money you can legitimately use for tuition fees, school holiday activities, private school fees, clothing, extra-curricular activities, presents, etc etc - basically anything for the children's benefit. Rather than you spending on the children from your post-tax drawings, you are effectively using your children’s allowances to fund their own (never-ending) expenses!
It’s not an aggressive tax scheme either.
The concept of a trust set up to hold capital is a long established and respected one. And with income tax savings of at least £4,387 per child per year (and rising), you’d be crazy not to look into it.
To find out more about this tax saving strategy feel free to drop me a line to arrange a strategic consultation.
Remember – making strategic use of your family’s personal allowances helps you to keep more of what you earn.
Happy tax saving!