The trouble with the “marriage allowance”

The marriage allowance

In April 2015 the government introduced the Marriage Allowance (MA) to meet its election promise to reward traditional family values. However, it turned out to be somewhat less generous than expected. It allows one partner to transfer 10% of his or her personal allowance to the other (£1,060 for 2015/16 and £1,100 for 2016/17), who’ll receive a tax reduction on it at the basic rate (20%). It sounds simple but in practice it’s not.

HMRC’s practice and guidance

The first problem was the excessive time it took HMRC to create a claims procedure and so claims were held up. The next barrier was, and still is, HMRC’s questionable guidance which indicates that to be eligible for MA the transferring spouse must have income of less than the personal allowance (£11,000 for 2016/17), and the other spouse income of less than £43,000. That’s incorrect, or at best economic with the facts.

What the law says

Strictly, the only condition linked to income is that the recipient of the transferred allowance must not be liable to tax at a rate higher than the basic rate. However, in practice a transfer will only save tax where the transferring spouse has income (other than dividends and savings income) less than their personal allowance, and there are further complications.

All or nothing

Contrary to popular belief, the MA is not a variable claim, it’s all or nothing.

Example. Say, for 2016/17 your spouse’s only income is a salary of £10,200. They therefore elect to transfer the MA to you. They can’t just transfer the unused part of their personal allowance (£800), the whole £1,100 must go. That means their personal allowance is reduced to £9,900 resulting in a tax bill of £60 ((£10,200 - £900 = £300) x 20%). Nevertheless, overall there’s a tax saving because you receive MA of £1,100 which reduces your tax by £220 (£1,100 x 20%). Tip.  Don’t make a claim during the tax year in which you first suspect an MA election can be made. Wait until after the end of the tax year when you can check that it will be tax efficient.

The claim traps

Just to complicate matters further there are quirks in the claims procedure to watch out for:

• a claim made during the tax year to which it applies stays in force until either the conditions cease to be met or the transferor withdraws the claim. But if the claim is made after the end of the tax year it only applies to that year - so remember to renew your claim
• even where a claim becomes tax inefficient, only the transferror can withdraw it. This is another reason for making claims only after the end of each tax year
• if the recipient tells HMRC they no longer require the MA, it will cancel it, not just for the current tax year, but right back to the year it was first transferred, up to four years.

The bottom line is that while you shouldn’t overlook this modest tax break (worth around £200 per year) you need to take care when claiming it.