Taxpayers may be missing out on tax reliefs for 2017-18.
Let’s examine the rules regarding the different allowances, eligibility and what happens when changes occur. Taxpayers living in the UK are entitled to a personal allowance and – if married or in a civil partnership – may also be able to claim marriage allowance or married couple's allowance too.
Marriage allowance should not be confused with the married couple’s allowance. So if you are entitled to the married couple’s allowance, you cannot claim marriage allowance as well.
The marriage allowance can be claimed by a married couple or civil partnership where both partners are no more than basic rate taxpayers.
The lower earner can transfer a fixed amount of £1,150 for 2017-18 of marriage allowance to the other.
This allowance can only reduce the recipient’s liability to nil, it cannot create a refund.
If you contact HMRC to stop transferring the allowance to your partner, it will end at start of the next tax year.
If your partner contacts HMRC to stop receiving your allowance, HMRC will backdate the change to the start of the current tax year.
If you get divorced or dissolve your civil partnership, contact HMRC to cancel the allowance. You can have the change applied at the start of the tax year (6 April) you got divorced in – or the start of the next one.
What is marriage allowance?
Marriage allowance was introduced from 2015-16. Subject to certain conditions an individual may transfer part of his/her personal allowance to a spouse or civil partner. The transferable amount is:
for the tax year 2015-16 is £1,060 and
for the tax year 2016-17 and subsequent tax years is 10% of the amount of the personal allowance for the tax year to which the reduction relates. If the transferable amount so calculated would not be a multiple of £10 it is rounded up to the nearest amount which is a multiple of £10.
Relief is given to the transferee spouse/partner by means of a reduction in what would otherwise be the transferee’s income tax liability equal to tax at the basic rate for the year on the transferred amount.
Conditions for transferor to meet
The transferor is married to, or in a civil partnership with, the same person when the election is made and for at least part of the tax year in question
The transferor is entitled to the personal allowance for the year
The transferor would not be liable to income tax at the higher or additional rate or the dividend upper or additional rate (assuming that the marriage allowance election was successful). The allowance is still available if the transferor didn’t earn anything at all in the tax year.
Transferors who are non-UK residents need to be eligible for a personal allowance.
Conditions for transferee to meet
The transferee is married to, or in a civil partnership with, a person who has made a marriage allowance election which is in force for the tax year in question
The transferee is not liable for that year to income tax at the higher or additional rate or the dividend upper or additional rate
The transferee is UK resident for the year or, if non-UK resident, is eligible for personal allowances
Neither the transferee nor the transferee’s spouse or civil partner makes a claim to married couple’s allowance for the year.
Taxpayers can backdate their claim to include any tax year since 5 April 2015 that they were eligible for marriage allowance. So while preparing the tax return for 2017-18, taxpayers can claim for 2015-16 marriage allowance transfer if they have not done already so.
Election for marriage allowance
The election must be made by the transferor no later than four years after the end of the tax year to which it relates. Provided the transferor conditions are met the election, once made, continues for each subsequent tax year unless:
it is made after the end of the tax year to which it relates, in which case it has effect for that one year only; or
it is withdrawn by notice given by the individual by whom it was made; or
the transferor’s spouse or civil partner does not obtain a tax reduction in respect of a tax year for which an election is in force, in which case it ceases to have effect for subsequent tax years, although the person can make further elections.
Example – 2017-18 tax year
A married woman receives taxable income of £9,000 in 2017-18 from self -employment and she has no other taxable income. Her husband has employment income of £43,000 and no other taxable income. They are not eligible for married couple’s allowance. The wife has elected for ‘marriage allowance’ to transfer part of her personal allowance to her husband.
Employment income 43,000
Less personal allowance 11,500
Taxable income 31,500
Tax due £32,000 @ 20% 6,300
Less transferable tax allowance £1,150 @ 20% 230
Tax due 6,070
Self-employment income 9,000
Less personal allowance 11,500
Less transferred tax allowance 1,150 10,350
Taxable income nil as income lower than Personal Allowance nil
If the personal allowance was not transferred then the husband would pay tax of (£31,500 at 20%) £6,300. Therefore the couple have saved £230 in tax by transferring part of the wife’s personal allowance.
Married couple’s allowance is available to any married couple where at least one spouse was born before 6 April 1935. Entitlement to married couple’s allowance is extended to same-sex couples who are civil partners under the Civil Partnership Act 2004 if at least one partner was born before 6 April 1935. Unlike the age-related personal allowance the age reference to 1935 does not normally change from tax year to tax year.
For marriages before 5 December 2005, the husband’s income is used to work out married couple’s allowance. For marriage and civil partnerships after this date, it’s the income of the highest earner.
Married couple’s allowance applies as a reduction in the claimant’s income tax liability. The reduction is 10% of the amount of the allowance. This tax reduction (like other tax reductions) is restricted to the extent that it would otherwise exceed the individual’s remaining tax liability after making all prior reductions.
The couple should be living together during the tax year. It is possible that when an elderly taxpayer moves into a care home the couple may become separated for tax purposes and the married couple’s allowance may no longer be available.
For the 2018 to 2019 tax year, it could cut your tax bill by between £336 and £869.50 a year. HMRC's calculator can be used to work out how much the claim can be worth.
What are the rules in the year of marriage or death?
Year of marriage
Where the marriage or civil partnership is entered into during the tax year (and in that year the person had not previously been entitled to the married couple’s allowance), the allowance is reduced by one-twelfth for each ‘fiscal month’ of the tax year ending before the date of the marriage or civil partnership.
For example, if marriage occurred on 3 October 2017, there would be five fiscal months (five months from 6 April 2017 to 5 September 2017) up to 3 October 2017. The reduction in the allowance is computed after applying any necessary restriction by reference to the income limit.
Year of death
Where either the husband or wife – or either civil partner – dies in a tax year then the married couple’s allowance is available as if the marriage or civil partnership had continued until the end of that tax year. There is no reduction in the married couple’s allowance in the year of death.
The ‘higher married couple’s allowance’ and ‘income limits’ are as follows:
Basic married couple’s allowance
Maximum married couple’s allowance
The ‘higher married couple’s allowance’ is available where the claimant or his wife is at any time in the tax year aged 75 or over, or would have been but for his or her death in that year. In recent years this would apply as if one of the spouses was born on 5 April 1935 that person would be 80 years old on 5 April 2015.
Where the claimant’s adjusted net income exceeds the income limit, the maximum allowance is reduced by one-half of the excess, except that it cannot be reduced to less than the basic married couple’s allowance (ie the married couple’s allowance is reduced by £1 for every £2 of income over this limit).
Example – 2017-18 tax year
Mr A is a married man, born on 1 February 1934. He has a net income of £33,000 for 2017-18 and no dividend income or savings income. He and his wife were married before 5 December 2005 and they were living together for the 2017-18 tax year.
Net income 33,000
Less personal allowance 11,500
Taxable income 21,500
Tax payable at 20% on £21,500 4,300
Less married couple’s allowance £5,945 @ 10% 595
Tax payable 3,705
Workings to calculate £5,705 figure above
Maximum married couple’s allowance 8,445
As income is over income limit of £28,000
Excess of net income over income limit
(£33,000 - £28,000) = £5,000
Maximum allowance reduced by half of excess £5,000/2 2,500