Special Report on Pep's and Tax Planning: Benefits of going it alone: Independent. Are you? Alison Eadie

FROM the start of the 1993 tax year, the married couples' allowance can be claimed in full either by the husband or the wife or split equally between the two. For the first time married couples have the right to make an election as to how the allowance is used and as of right the wife can claim half. The allowance at present is pounds 1,720 on top of the single person's allowance of pounds 3,445.

The change is intended to confer equality of treatment and is not a tax-planning device, the Inland Revenue says. Election must be made in advance and the relevant Form 18 has to be sent to the taxman before the end of the present financial year to obtain the desired split for 1993/94.

The disadvantage, particularly for self-employed people who may not be sure what their income will be, is that the election could prove wrong if the earnings of both partners do not match expectations. The advantage is that a 25 per cent tax-paying husband can transfer the allowance to his 40 per cent tax- paying wife and bring her larger bill down. In the past independent taxation, which was introduced in April 1990, only allowed the wife to utilise the married couples' allowance if the husband had insufficient income to use it up. Independent taxation requires forward planning in several areas, particularly where one partner is a non-taxpayer or where one partner pays tax at a higher level than the other.

Interest from bank and building society deposit accounts and dividends from shares should be carefully allocated to make sure personal allowances are used up. The non-taxpayer or less heavily taxed spouse should have the interest or dividends in his or her name. Such a division of the spoils assumes a stable marriage based on total trust.

Non-taxpayers can register in advance to have interest on bank or building society accounts paid gross. But the Revenue stresses the tax position must be stable and there must be no question of the investor becoming a taxpayer halfway through the year.

Alternatively, tax on interest can be reclaimed, as can tax on dividend income from shares, which cannot be paid gross as a result of prior registration. A non-taxpayer can reclaim the 25 per cent levied on building society interest and a 20 per cent taxpayer can claim back 5 per cent.

Independent taxation also conferred a capital gains tax allowance on each spouse instead of a joint allowance. The present threshold is pounds 5,800 per person per year. Again, as CGT is levied according to income tax rates, it makes sense for any realisations that will breach the ceiling to be made by the non-taxpayer or lower taxpayer. Assets should be transferred to the less wealthy half of the partnership.

Inheritance tax rules similarly allow pounds 3,000 to be given tax-free by each spouse each year. The allowance rises to pounds 5,000 for marriage gifts to children. Decisions on CGT and inheritance tax allocations need to be made by the end of the financial year, because unused allowances lapse. Similarly, tax-efficient savings schemes such as PEPs, which allow investment of pounds 9,000 per person or pounds 18,000 annually for a married couple, die at the end of the tax year if not used.

The benefit of independent taxation has to some extent fallen on people who are not aware of it and not reaping the rewards. The Inland Revenue is spending pounds 2m on publicity to try to persuade non-taxpayers or those on low incomes to reclaim tax they should not have paid.

The main recipients will be non-earning married women and pensioners. The Revenue has found the elderly are most likely to be confused by the tax rules, yet with their higher personal allowances they are often paying unnecessary tax. The single person's allowance rises to pounds 4,200 for those aged 65 to 74 and to pounds 4,370 for those over 74 years.

Leaflets to help those confused by the new rules include Are You Paying Too Much Tax on Your Savings? (IR127); the more detailed A Guide for People with Savings (IR 110); and Income Tax and Married Couples (IR80), which explains how independent taxation works and what the various options are on CGT, inheritance tax and so on.

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