Marriage Tax Allowance

Marriage Tax Allowance

​My GURU Martin Lewis Wrote this brilliant piece on Marriage Tax Allowance. So I thought I would Share…..

Are you married or in a civil partnership? If so you may be entitled to a £212 tax break called the marriage tax allowance. Yet 3.6 million of the 4.1 million eligible couples are still missing out. It’s free money, so worth checking, but GO QUICK to get the cash for this year before your employer’s March payroll cut-off.

The marriage tax allowance is a new way for couples to transfer a proportion of their personal allowance (the amount you can earn tax-free each tax year) between them. Here’s our quick Q&A on how to get it, plus some key information.

Note: For the 2016/17 tax year the personal allowance for most people will be £11,000, the transferable marriage allowance will be £1,100 and the tax benefit will be £220. We’ll update this guide when the new tax year starts on 6 April 2016.

Q. Who can get it? This is the most important factor as only people with these specific circumstances will be able to apply:

  • You’re married or in a civil partnership (just living together doesn’t count).
  • One of you needs to be a non-taxpayer, which usually just means earning less than the £10,600 personal allowance.
  • The other one of you needs to be a basic 20% rate taxpayer (couples with a higher- or additional-rate taxpayer aren’t eligible for this allowance).
  • Both of you must have been born after 6 April 1935 (if not there’s another tax perk).

So in a nutshell one of you must be a non-taxpayer and one of you must be a basic-rate taxpayer.

Q. Sounds promising – so how does it work? The partner who has an unused amount of personal allowance can transfer £1,060 of their allowance to the other (so basically 10% of the full allowance). It doesn’t matter if they have £5,000 of their allowance left unused or £500; they can only transfer £1,060.

This is how it works:

Part-time Peter works just enough and earns £5,000 at his local fish and chip shop. His full personal allowance for the year is £10,600, so he has plenty of spare allowance to transfer £1,060 to his wife.

Peter’s wife, full-time Fiona, is a software developer. She earns £35,000 and is a basic-rate taxpayer (higher-rate tax starts at £42,385 for most). Her personal allowance increases by £1,060 to £11,660 when Peter chooses to make his transfer.

So she has an extra £1,060 which she would’ve paid tax on at 20% but is now tax-free, so she’s £212 up (20% of £1,060).

Q. OK, so how do we actually apply? It really is very simple, and only takes a few minutes, just use the application at HM Revenue & Customs (HMRC). To do it you’ll need both your National Insurance numbers, and one of a range of different acceptable forms of ID for the non-taxpayer.

If there’s a problem doing it via the web just call 0300 200 3300 and do it by phone.

There is one very important point to make though…

It’s the non-taxpayer who must apply to transfer their allowance.
If the taxpayer applies you’re doing it the wrong way round and it won’t work.

After going through the application process you’ll be notified immediately if you’re eligible for the allowance via email (you can apply over the phone too)

 

In most cases, the allowance will be given by adjusting the recipient partner’s personal tax code. The partner who transferred their personal allowance will also receive a new tax code, if employed. If the recipient partner is in self-assessment, it will reduce their self-assessment bill.

Q. How do I know if I’m a non-taxpayer? In general it is simply if your taxable income between 6 April 2015 and 5 April 2016 totals £10,600 or less, then for the purposes of the marriage tax allowance, you’re a non-taxpayer.

You might be on maternity leave, self-employed, a volunteer, working part-time, unemployed, working full-time, not working because of health issues, or retired – it doesn’t matter. If you earn under £10,600 in the year you almost certainly qualify.

Now there are exceptions – but these are niche, so don’t get bogged down by them. In rare circumstances, your personal allowance (the amount you can earn tax-free) is different – your tax code letter would tell you – such as because you have a company car. Or you may have savings interest which takes you over the threshold

Q. Ah, but what if I have less than £1,060 of unused personal allowance – can I still take advantage? Yes, you can, but it’s a bit more complicated. This is because you have to transfer £1,060 to take advantage – nothing more, nothing less. This means that if you’ve less than £1,060 left of your allowance, you could see yourself exceeding your personal allowance. If that happens, you’d end up paying tax on the amount you’ve gone over. There will still be a net gain for the two of you, just not that much.

This is how it works:

Part-time Peter decides to put in a few extra shifts at the chippy and his earnings go up to £10,000 a year. His full personal allowance for the year is £10,600, so by transferring £1,060 to his wife, he’s left with a personal allowance for the year of £9,540.

Full-time Fiona still gets the full personal allowance increase of £1,060 to £11,660 when Peter chooses to make his transfer.

However, Peter now earns £460 more than his personal allowance, meaning he’ll pay basic-rate tax for the year of £92. Meanwhile, Fiona gets an increase in her personal allowance of £1,060, so she’ll get to keep an extra £212 (the 20% tax she would have had to pay).

The net benefit to Peter and Fiona is £120 – still worth having. And there are no circumstances where it can be negative. This year, the basic personal allowance for most is £10,600, meaning that’s how much you can earn in the tax year before paying tax. So only if the lower earner in the couple earns less than £9,540 (£10,600 less £1,060) will they get the full £212 basic-rate tax saving.

Q. What if either or both of us are self-employed? It doesn’t matter. As long as you fulfil the eligibility criteria above, you can apply. The only difference is if the recipient partner is in self-assessment, it will reduce their self-assessment bill.

Q. I’m having difficulties applying online – what can I do?Some people have reported difficulties applying online. If this is you, call HMRC on 0300 200 3300 for help.

Q. What happens if we’ve applied and then cease to be eligible midway through the tax year? For example, the taxpayer gets a pay rise which makes them higher rate for the year, or the non-taxpayer starts working.

If that happens HMRC will know (you don’t need to tell them) and alter your tax code to claw it back via the payroll (or self assessment for the self employed).

Q. What if I’ve applied in error – will I be fined? Although it’s highly unlikely your application would be accepted if you weren’t eligible, you still won’t be fined. As above, the underpaid tax would be collected through a PAYE code adjustment.

Q. Is there a cut-off date to apply? No, but there is a cut off to get the whole amount paid in the 2015/16 tax year.

When you’re applying for the current year, it’s paid via changing your tax code over the remaining months of the tax year.

So if you’re applying in March 2016, and it’s in time for your employer’s March payroll, you’ll get all the £212 benefit straightaway in your March pay packet.

Yet if you leave it you’ll still get the gain, but it’ll be spread over your 2016/17 tax year (alongside next year’s marriage tax allowance) via the payroll.

Q. If someone doesn’t claim this can it be backdated? Yes, you will be allowed to claim back up to four years, but it only started in April 2015, so you can’t go beyond that.

Q. Do we have to apply every year? No. Your personal allowance will transfer automatically to your partner every year until one of you cancels the marriage allowance or you inform HMRC that your circumstances have changed, eg, because of divorce, employment pushing you into a higher rate tax threshold, or death.

Q. What happens if my partner dies? If your partner dies after you’ve transferred £1,060 to them, their estate will be treated as having an increased personal allowance while your own personal allowance will revert back to what it was before the transfer.

If your partner transferred some of their personal allowance to you before they died, then your own personal allowance will stay at the higher level until the end of the tax year while their estate will be treated as having the lower amount.

Q. What happens if we divorce or dissolve our civil partnership? Assuming you want to cancel the allowance, then you mustcontact HMRC.

Q. I’ve seen on the government website it says you can’t get the marriage tax allowance if you have over £5,000 of savings interest? That’s not true. We’ve had a few people ask us this question – if this is you, you’re probably misreading the situation.

It comes from this question on the apply section of the HMRC website:

“Is your annual income £10,600 or less? (don’t include savings interest under £5,000).”

It’s all about what counts as a non-taxpayer, and it does get a little complicated as it’s all due to something called the tax-free savings allowance for lower incomes. That means you can earn £10,600 under your personal allowance and then have £5,000 of savings interest tax-free and still not pay tax on it.

So in that circumstance you could actually earn more than £10,600 in total income and interest, and still count as a non-taxpayer. This question is just a slightly cumbersome way of saying that.

Q. I was born before 6 April 1935 – why can’t I get this? This is because there’s a different, better allowance available to you, that HMRC is phasing out. If one of you is over 80, then you could be eligible for the married couple’s (& civil partner’s) allowance. This could give you a reduction on your tax bill of up to £835. However, if you’re an unmarried couple (even if you’re living together), then you get nowt.

Q. Isn’t this discriminatory against people who aren’t married, or who earn more?
Quite simply yes. This is a government policy to reward the institution of marriage. It does it because it believes that provides a more stable family.

The fact it’s a transfer from the non-taxpayer to an earner also indicates a concept of rewarding the perhaps more old-fashioned “one parent stays at home”-type set-up.

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