According to LLC Partner and former pensions minister, Steve Webb, hundreds of thousands of women pensioners who have shared their personal allowance with their husband could face unexpected tax bills.
Marriage Allowance
With Marriage Allowance, you can transfer up to £1,260 of your personal allowance to your spouse or civil partner. Your personal allowance is the amount of income you can earn without paying any income tax, and it is currently set at £12,570.
In order to benefit from Marriage Allowance, one person must be paying the basic rate of tax (applied to earnings between £12,571 and £50,270) and the other must not be paying income tax (as they earn below £12,570).
The lower earner then shares part of their personal allowance with the higher earner to reduce their spouse or civil partner’s tax burden. Marriage Allowance can reduce the higher earner’s tax by up to £252 in the 2023/24 tax year.
You can use HMRC’s free online service to see whether you could reduce your annual tax bill from Marriage Allowance, and if so, by how much.
Unexpected Tax Bills
Once you opt in to the system of Marriage Allowance, the transfer of your personal allowance happens automatically every year unless cancelled. If you wish to cancel Marriage Allowance you can do so here.
Previously, many could hand over 10% of their personal allowance at no cost to themselves. However, big cash increases in the value of the State Pension, combined with the freezing of the income tax threshold, means many more of these individuals will now be liable to pay tax.
Why are Women Pensioners Disproportionately Affected?
Government figures suggest around 2.1 million couples benefitted from Marriage Allowance in 2020/21, with over 1/3 of these estimated to be pensioner couples. In most of these cases, the wife is the non-taxpayer who is sharing her personal allowance with her husband.
In many working-age couples, the lower earner may be earning little or no taxable income if they are a stay-at-home partner, whereas with many pensioner couples, the lower earner will be close to the tax threshold due to the State Pension.
“This is yet another unwelcome by-product of the year-on-year freeze in the value of the tax allowance. Hundreds of thousands of women have signed over part of their tax-free allowance in order to reduce their husband’s tax bill. But as the state pension rises, many of these women may now find they end up with an unexpected tax bill. We could see marriage allowance mayhem as hundreds of thousands of couples have to decide whether to carry on with this arrangement or cancel it, to avoid low-income pensioners being dragged into the tax net. The sooner the freeze on tax allowance comes to an end, the better”