Maximising a client’s pension and ISA savings is the cornerstone of sound financial planning but a sound tax planning strategy requires taking advantage of all reliefs and allowances where possible. One of the commonly misunderstood, and therefore often unclaimed, allowances available is the “marriage allowance”.
Neil Macleod, Senior Technical Manager, Specialist Business Support at M&G wealth outlines the top 5 questions causing confusion around marriage allowance.
Q. Who can make a claim for marriage allowance?
Where a couple are married or in a civil partnership, and one spouse is a non-taxpayer, it is possible to effectively “transfer” 10% of their personal allowance to their spouse or civil partner.
Marriage allowance was introduced from 6 April 2015. The eligibility criteria are
The conditions that need to be met to be eligible to make a claim for marriage allowance are:
• You must be married or in a civil partnership;
• You do not pay Income Tax or your income is below your Personal Allowance (usually £12,570);
• Your spouse/civil partner pays income tax at the basic rate i.e. if they have income taxed at higher or additional rate, they will not be eligible for marriage allowance.
Q. How is a claim for marriage allowance made?
The claim can be made online, through self-assessment or by filling in a marriage allowance transfer form.
On making a claim, the non-taxpaying spouse will then be treated as having a personal allowance of just 90% of the full personal allowance (£11,310 for the 2024/25 tax year). The recipient will receive a tax reduction equivalent to £252 for the tax year. The tax reduction will be applied through a change in tax code which will then have an “M” at the end.
Claims can be backdated for up to 4 tax years as long as the eligibility criteria were met for the earlier years (a claim can even be made on behalf of a deceased partner). The claim will continue automatically every year until it is cancelled.
Q. How is the tax saving passed on in practice?
Contrary to popular belief, marriage allowance doesn’t actually increase the personal allowance of the recipient. Marriage allowance is given as a “tax reducer” at step 6 of the UK income tax calculation under section 23 of the Income Tax Act 2007.
The recipient partner’s income is calculated as normal based on their standard personal allowance but there is a deduction from their tax bill before arriving at the final tax liability for the year. The tax deduction is based on 20% of 10% of the personal allowance. For the 2024/25 tax year, the deduction is based on a rounded up personal allowance of £12,600 so equates to £12,600 x 20% x 10% = £252.
The non-taxpaying spouse will have their personal allowance reduced by 10%. This means in certain cases; tax could end up being paid on previously untaxed income resulting in a lower overall tax saving for a couple.
Q. If the spouse electing to have their personal allowance reduced has a bond gain in excess of the personal allowance but pay no tax due to the starting rate for savings, are they eligible still to make a claim?
To be eligible, “hypothetical net income” must be less than the personal allowance for that tax year. Hypothetical net income is income as calculated at step 2 of section 23 of the Income Tax Act 2007 and is essentially income subject to income tax after deduction of any net pay pension contributions and gross contributions where relief is obtained on making a claim. The full amount of a bond gain is included at step 2 in the income tax calculation so a gain exceeding the personal allowance would prohibit a claim.
Q. If an individual has a bond gain that falls into the higher rate band but due to top slicing relief the higher rate tax is mitigated, can they make a claim?
The spouse benefitting from the tax reduction must not be liable to income tax at higher rate on any of their income in the tax year concerned. Top slicing relief is a tax reducer, so while it can help to reduce an individual’s tax bill, it does not mean the full gain is taxed at a lower rate. A bond gain in the higher rate tax band would therefore make an individual ineligible to claim marriage allowance.
Main image: Neil presenting at our Glasgow Technical Insight Seminar, September 2024.
