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.
Marriage allowance
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.
For marriages pre-December 6 2005, the relevant tax payer is the husband – for later marriages or civil partnerships it is the higher earner of the couple.
The full saving is available where the relevant tax payer’s income is £29,600 or lower. Thereafter it is tapered down to the lower amount using a ratio of 2:1.
Child benefit trap
The high-income child benefit tax charge was introduced in January 2013. It applies where an individual, or the individual’s partner, is receiving child benefit and has adjusted net income over £50,000. Allowable deductions to calculate adjusted net income include relief at source pension contributions, cycle to work schemes and Gift Aid donations.
The definition of partner is wider here – it is not limited to couples in a marriage or civil partnership. The tax charge is in direct proportion to the amount of child benefit received.
In 2019-20, child benefit is paid at £20.70 a week for the eldest child and £13.70 for subsequent children, but limited to two children where a third or subsequent child was born after April 5 2017 unless special circumstances apply.
For every £100 that adjusted income exceeds £50,000, the higher earner incurs a tax charge equivalent to 1 per cent of the child benefit received in that tax year. The charge is paid via self-assessment. This means that the trap does not actually start until taxable income is £50,100 or higher. At an adjusted income of £60,000, the tax charge is equivalent to 100 per cent of child benefit. Therefore there is a ‘child benefit trap’, where the effective tax rate is higher than 40 per cent. See Box 2 for an example.
Planning opportunities
The increase in the personal allowance and basic rate bands mean that £50,000 is the usual threshold for higher-rate tax. Because it is also the point at which the child benefit trap starts, couples with one higher earner and one lower/non-earner could find that reducing the higher earner’s income to £50,000 could not only eliminate the HICBTC but also qualify them for the marriage allowance. See Box 3 for an example.
Income of £50,000 has become another tax ‘pinch point’. For those with individual income in this area, a little planning can deliver substantial tax savings.
Victoria Harman is senior technical expert at Hargreaves Lansdown
