Although independent taxation was introduced almost 30 years ago, there are still scenarios where a couple’s income should be considered jointly.
It was April 1990 when married couples finally switched from being taxed as one unit via the husband’s tax return, to being taxed independently.
This means that for the bulk of financial planning decisions, income should be assessed in isolation. However, there remain two exceptions; for marriage allowance and child benefit, a couple’s income should be analysed together to determine whether an allowance or tax charge applies.
Introduced in April 2014, strictly speaking this is actually an income tax reducer rather than an allowance. Increases to both the personal allowance and basic rate band for 2019-20 mean that more couples than ever are likely to be eligible.
Individuals who are married or in civil partnerships, are basic rate or nil rate tax payers, and have a spouse or civil partner who pays income at basic rate, can benefit from transferring up to 10 per cent of their standard personal allowance (currently £12,500) to their partner.
The recipient partner receives an income tax reduction equivalent to basic rate tax relief on the transferred amount, often given via a tax code adjustment.
The most obvious scenario where the marriage allowance can be beneficial is where one partner has unused personal allowance. This might be ongoing or for ad-hoc reasons – such as people caring for family members, taking career breaks and those who have retired but not yet taken pension income.
However, it could also be useful where both partners are basic rate taxpayers but one has taxable dividend income while the other receives earned, pensions or savings income.
Applying for the marriage allowance could mean exposing more dividend income to 7.5 per cent tax in return for sheltering more earned or savings income from 20 per cent basic rate tax.
The maximum that can be transferred is capped at 10 per cent of the standard personal allowance, which for the current tax year equates to £1,250. The tax reduction is 20 per cent of the amount transferred, offering an income tax saving up to £250 this tax year. See Box 1 for an example.
Making the election
First, the person doing the personal allowance transfer must make the election.
An election can be made up to four years after the end of the tax year for which the election is being made, which based on the current tax year is 2015-16 onwards. This is the case even if one of the partners has died since April 5 2015.
While the potential saving each tax year is modest, the ability to backdate and the ease of applying means it is worth doing where eligibility has been met.
Married couple’s allowance
The marriage allowance should not be confused with the married couple’s allowance.
The MCA is available where one of the spouses/civil partners was born before April 6 1935. It can reduce the couple’s tax bill by between £345 and £891.50 this tax year, depending on the relevant tax payer’s income.