Craig Muir , senior pension intermediary development & technical manager, Royal London, highlights the effect of the State Pension increase for those who use their Marriage Allowance to mitigate tax.
The Chancellor confirmed in the Autumn Statement in November 2023 that the Government is maintaining the triple lock on the State Pension in 2024. Although this is very welcome news for pensioners, those who use their Marriage Allowance to mitigate tax may need to consider if this increase could reduce the tax benefits of the allowance.
Triple lock stays for 2024
The triple lock ensures the State Pension rises each year in line with the highest of 2.5%, average wage growth between May and July (compared to those three months in the previous year), and inflation, using the Consumer Prices Index in the year to September.
As average wage growth was the highest of those three at 8.5%, this is the increase applied to the State Pension from April 2024. For someone receiving the full new State Pension, this means an increase from the current £203.85 per week to £221.20 per week. The equivalent annual figures are £10,636.60 up to £11,541.90 from April 2024, so a £905.30 per annum increase.
From an advice point of view, this may need to be factored into a client’s retirement planning forecast, especially if they’re targeting a certain level of income.
The Marriage Allowance
The Marriage Allowance allows a non-taxpayer to transfer £1,260 of their Personal Allowance if their spouse or civil partner is a basic rate taxpayer. This increases the spouse or civil partner’s Personal Allowance and reduces their taxable income.
Probably the most obvious situation to think of is a married couple with one at home looking after children. However, it’s also important to think about clients who are retiring, or retired, and find themselves being a basic rate taxpayer with a spouse who is a non-taxpayer. This scenario is common as many higher rate taxpayers will try and manage their income, so they become basic rate taxpayers in retirement.
Additionally, with a Consumer Duty hat on, we need to be mindful of good outcomes and avoiding foreseeable harm, so the Marriage Allowance should always be considered for applicable clients.
Currently if the non-taxpayer receives the full current State Pension of £10,636.60 per annum, and they transfer £1,260 to their basic rate taxpaying spouse or civil partner, this will still be within their personal allowance of £12,570 per annum. This saves the basic rate taxpayer £252 in tax and can be back-dated four years if applicable.
A potential problem?
With the new State Pension increasing to £11,541.90 from April 2024, if the non-taxpayer continues to transfer the Marriage Allowance of £1,260 to their spouse or civil partner, this will take them over their Personal Allowance limit, and they will start to pay tax. It’s not possible to transfer a lower amount so the non-taxpayer will need to pay £46.38 in tax. However, the overall net benefit to the couple will still be an income tax saving of £205.62 in the 2024/25 tax year.
Another consideration is couples who use the Marriage Allowance prior to State Pension age. When the non-taxpayer hits State Pension age, and they receive the full new State Pension, this will cause them to become a taxpayer.
It’s worth bearing in mind the Marriage Allowance when considering the tax position of clients as this can reduce their tax and boost their income, even by a small amount. Ultimately, the issue is the State Pension is about to increase by 8.5% but the Personal Allowance has remained static.
