Historically, married couples and those in civil partnerships have been in a more tax privileged position – such as with income, capital gains and inheritance tax – than those couples who cohabit. Many see this, understandably, as outdated and unfair, and the recent challenge of the Marriage Allowance by Labour also reflects this view.
There is an abundance of tax planning opportunities for couples, so for this article I thought I would look at the Marriage Allowance and Married Couples Allowance, both of which are available to those in marriages as well as civil partnerships. Both allowances are not, perhaps, as straightforward as first thought of, but they can be incredibly valuable.
Under the Marriage Allowance, an individual can transfer up to £1,250 of their unused personal allowance to their partner, provided neither pays tax at the higher rate, nor are they in receipt of Married Couples Allowance. In conversations I have had with advisers it is clear, in some instances, that there is a misunderstanding as to how the Marriage Allowance works in practice.
It should be understood that the recipient does not actually have their personal allowance increased, but tax relief is applied by means of a reduction in the recipient’s income tax liability. The reduction is at the basic rate of tax, giving a maximum reduction in tax for 2019/20 of £250 when the full £1,250 of personal allowance is transferred.
Turning to the Married Couple’s Allowance, which is only available where one of the spouses was born before 6 April 1935, and so naturally the number of those who can claim it is diminishing. The maximum amount available for 2019/20 is £8,915, however, the allowance is reduced by £1 for every £2 of their adjusted net income exceeding £29,600, but the allowance will not reduce below the basic Married Couples Allowance of £3,450.
This allowance is applied, based on:
- For marriages entered into on or after 5 December 2005, the allowance is given to whichever of the two individuals has the higher income for the tax year in question, and the amount of the allowance is determined by the level of that individual’s income.
- For marriages entered into before 5 December 2005, the allowance is given to the husband and the amount of the allowance is determined by the level of the husband’s income.
- A couple who were married before 5 December 2005 may elect for the new rules to apply to them instead of the old rules.
- A married woman (for pre-5 December 2005 marriages) or lower income spouse (for marriages on or after 5 December 2005) is entitled, as of right, to claim one half of the basic allowance. Alternatively, the couple may jointly claim for an allowance equal to the whole of basic allowance to be given to the wife or lower income spouse as the case may be. In either case, the allowance available to the other spouse is reduced accordingly.
- If either spouse pays insufficient tax to use the full married couple’s allowance, they may notify HMRC that the unused amount is to be transferred to the other spouse.
The Married Couple’s allowance is given by means of a reduction in the claimant’s income tax liability. The reduction is 10% of the amount of the allowance available, reducing an individual’s tax liability from anything between £345 to £891.50. If any part of this allowance is likely to be wasted due to an insufficient income tax liability, a claim should be made to allocate it to the other spouse if they can make use of it.
The Office of Tax Simplification (OTS) observed that in 1996 1.5m people cohabited, but this had more than doubled to 3.3m by 2017. The OTS holds the opinion that a review is required on social change and this in turn may lead to a further challenge that cohabitees should be able to access such tax advantages or if they should be removed altogether.
Only time will tell but, as always, it is important that full advantage is taken of this happy home, while these allowances are available.
Neil MacGillivray is head of technical support at James Hay