Tax: Marriage allowance opportunity
With 5 April 2020 only five months away, Donald Drysdale notes the importance of this date for electing for ‘marriage allowance’ – not to be confused with ‘married couple’s allowance’.
The transferable tax allowance for married couples and civil partners (commonly known as the ‘marriage allowance’) was introduced with effect from 2015/16.
Where one party (referred to in the legislation as ‘the gaining party’, and in this article as ‘the transferee’) has income below certain limits, the marriage allowance enables a specified amount of personal allowance to be transferred to them by their spouse or civil partner.
The amount that can be transferred is 10% of the transferor’s personal allowance (rounded up to the nearest £10). The benefit to the transferee is not an additional personal allowance; instead, it is a tax reduction of 20% of the amount transferred.
The transferable allowance for 2019/20 is £1,250, so the maximum tax saving arising from an election for marriage allowance for this year is £250. If an election were to be made now for all five years from 2015/16 through 2019/20, the total tax saved could be as high as £1,150.
The legislation governing marriage allowance can be found in Income Tax Act 2007 sections 55A–55E.
The transferee (the spouse or civil partner to whom the marriage allowance is transferred) must be a UK resident or fall into one of a number of categories of non-resident entitled to UK personal allowance.
The transferee must not be liable to income tax at a rate other than the basic rate, default basic rate, savings basic rate, Scottish basic rate, any Scottish rate below the Scottish basic rate (e.g. Scottish starter rate), Scottish intermediate rate, Welsh basic rate, dividend ordinary rate, dividend nil rate, savings nil rate or starting rate for savings – in other words, their income must be below the higher rate threshold.
Marriage allowance can apply only where the above conditions are met, where an election by the transferor is in force for the tax year, and where neither party has claimed ‘married couple's allowance’ – a completely different allowance which is explained below.
Position on death
Since 29 November 2017, it has been possible for an individual to elect to transfer marriage allowance to their deceased spouse or civil partner. Likewise, a deceased individual's personal representatives can make any marriage allowance election that the deceased could have made.
Notwithstanding that the law was changed on 29 November 2017, these provisions apply even where the death occurred before that date. This backdates the change to 2015/16, when the transferable tax allowance was introduced.
There is a four-year time limit within which an election for marriage allowance may be made by the transferor (or, if applicable, by the transferor’s personal representatives). Therefore 5 April 2020 will be the last date on which such an election may be made for 2015/16.
If an election is made after the end of the tax year in question, it applies for that year only. If made in-year, it applies for that and all subsequent years until it is withdrawn, or until it becomes ineffective because in a particular year the necessary conditions are not met.
An election made by personal representatives is irrevocable. In other cases an election may be withdrawn only by the transferor who made it. Normally withdrawal takes effect from the following year, but it may apply for the current year in cases where a marriage or civil partnership ends.
Marriage allowance is a matter reserved to Westminster. However, the means-testing which restricts it from those liable at the higher or additional/top rates of tax impacts adversely on Scottish taxpayers, because they are subject to the harsher tax rates and thresholds set by Holyrood.
Broadly, for 2017/18, when the basic rate was 20% both north and south of the border, a marriage allowance transferee had to have an income not exceeding £43,000 if a Scottish taxpayer – or an income not exceeding £45,000 if a taxpayer elsewhere in the UK.
Since then the tax rates and thresholds have diverged further. For 2019/20, a Scottish taxpayer can only receive a marriage allowance transfer if their income does not exceed £43,430, whereas the limit for a taxpayer elsewhere in the UK is £50,000.
This substantial difference in treatment may seem unfair in the case of what was intended to be a UK-wide tax allowance, but is an inevitable result of the way the Scottish Government has chosen to exercise its devolved tax powers.
Given that some 44% of adults in Scotland don’t pay income tax, it is probable that many of them have spouses or civil partners eligible to elect for marriage allowance. It is also probable that many are not making the election because they don’t know how to do so.
Marriage allowance can be applied for online, but it is widely misunderstood. Only last year, HMRC confirmed that about one in four of the 4.2 million couples eligible for it were failing to elect for it.
For young and middle-aged couples who (typically) have two incomes, electing presents practical difficulties. For example, are they aware of the allowance? Are they eligible? And, if so, which party should elect for the allowance?
For older couples, the process is equally frustrating, and there may be many instances where they are eligible but fail to elect.
In an ideal world, HMRC would hold sufficient data to determine who is eligible to elect for marriage allowance, and they would calculate it and apply it automatically. However, it seems that this is not feasible in a regime based broadly on independent taxation of each individual.
Married couple’s allowance
Unsurprisingly, many taxpayers confuse marriage allowance with married couple’s allowance. A taxpayer may claim the latter if they are married or in a civil partnership, and living with their spouse or civil partner, and at least one of them was born before 6 April 1935.
For this purpose they can still be treated as living together if they are unable to do so because of illness or old age (e.g. if one of them is in residential care), or if one is working away from home, away on an armed forces posting, in prison, or away on training or education.
The married couple’s allowance reduces the claimant’s income tax liability by 10% of the amount of the allowance. For 2019/20 the full allowance is £8,915, giving rise to a maximum income tax saving of £891.50.
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