Tax Breaks for Married Couples

There have historically been a number of elements of the tax legislation specifically aimed at married couples (extended to include those in a civil partnership, and I use the word ‘spouse’ hereinafter to include civil partners). There are certain such tax breaks which may be more familiar to some and quite commonly used e.g. the ability to transfer assets between spouses at ‘no gain/no loss’ for Capital Gains Tax purposes which, in other circumstances between individuals could give rise to tax liabilities.

The ‘Married Couples Allowance (MCA)’ is another example of a tax allowance specifically available for married couples or civil partners but since the rules were changed in 1999/2000 this only now applies to couples where one of the spouses was born before 6 April 1935.

A newer relief for married couples and civil partners which will potentially apply to many more couples is the ‘Transferable Tax Allowance’ (or ‘Marriage Allowance’ as it is now more commonly known).  This is not to be confused with the ‘Married Couples Allowance’ mentioned above.  When the Marriage Allowance was originally announced by the Government it estimated that around 4.2 million couples would be eligible.  However, recent figures suggest that only a fraction of that number have made a claim for the allowance.

How does the Marriage Allowance work?

The Allowance came into effect on 6 April 2015. For spouses to claim the Marriage Allowance they must both be entitled to a UK personal tax allowance and neither of them can be higher rate or additional rate taxpayers, which for most people means their total taxable income has to be no more than £42,385 for the current tax year ending 5 April 2016.

The Allowance works by one spouse transferring 10% of his or her personal allowance to the other spouse.  For the tax year ending 5 April 2016 the standard personal allowance is £10,600 meaning that if an individual has total taxable income for this year of no more than that amount, they will not pay any income tax.

If the above conditions are met, one of the partners can transfer £1,060 of their personal allowance to their spouse (and must transfer all of this - partial claims are not permitted).  This would increase the personal allowance of the spouse receiving it to £11,660 in most circumstances which potentially saves the couple up to £212 in tax (the 20% basic rate of income tax multiplied by £1,060).

As you will appreciate, this Marriage Allowance is likely to only be beneficial if one of the spouses has insufficient income to use their personal allowance.  For example, if David and Victoria are a married couple with David earning £9,000 per annum and Victoria earning £40,000 per annum with neither of them having other taxable income, David is not using £1,600 of his personal allowance this year so by transferring £1,060 of that to Victoria, she would save tax of £212 meaning the couple are better off overall by doing this.

How can I claim this allowance?

The Marriage Allowance must be claimed by the individual in the couple wanting to transfer some of their personal allowance, so in the above example, David must make the claim.  This must be done within four years of the end of the tax year, so for the current tax year ending 5 April 2016, the claim must be made by 5 April 2020.

A claim can be made online at www.gov.uk/marriage-allowance or by phoning the income tax helpline on 0300 200 3300. You will need National Insurance numbers and dates of birth etc. for you and your spouse.  For those within self-assessment who prepare a Tax Return, the claim can be made on the Tax Return for the year in question. If the application is successful, HM Revenue & Customs will backdate the claim to the beginning of the tax year e.g. if you make the claim now in respect of the year ended 5 April 2016, it will be backdated to 6 April 2015.  The adjustment is usually made by amending the tax codes of both partners.  The spouse receiving the transferred allowance will see their PAYE tax code increase by that amount and have an ‘M’ added at the end e.g. in most cases their tax code would be 1166M for 2015/16.  The spouse who has transferred the allowance will have his or her tax code reduced and an ‘N’ added at the end of their code number. 

What happens in future tax years?

Once the election has been made, it remains in force for each subsequent tax year until it is withdrawn by the taxpayer.  It is up to the individuals concerned to monitor their tax affairs and ensure the claim is withdrawn if any of the conditions above are not met e.g. if the spouse transferring the allowance becomes a higher rate taxpayer in a subsequent year or obviously if the couple divorce etc.

The Marriage Allowance is fixed at 10% of the personal allowance, so is due to increase in line with increases to the personal allowance. So under the current proposals put forward by the Government for increases to the personal allowance, the Marriage Allowance will be £1,100 for 2016/17 and gradually increasing to £1,250 by 2020/21 (as it is the intention of the Government to increase the standard personal allowance to £12,500 by 2020/21).  However, a lot can change between now and then!

The above is for general guidance only and no action should be taken without obtaining specific advice