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Money Talk: Marriage Allowance rule explained as retiree's state pension sparks tax bill


Janet, 67, who lives in Nottingham, began paying Income Tax this year, after starting to receive money from her workplace pension – in addition to the state pension. She currently claims the Marriage Allowance, but now, Janet is looking to work out whether she and her husband would be better off no longer accessing this form of tax relief.

Having written into Money Talk, Express Money put Janet’s question to two financial experts – Kay Ingram, Director of Public Policy at national financial planning firm LEBC Group, and Tom O’Brien, financial planner at wealth manager Brewin Dolphin.

“Hi, I am retired receiving state pension.

“I have started paying tax this year as with my new occupational pension I now have to pay tax because I am on the Marriage Allowance rate.

“My husband is still working. Please could you tell me how do I work out if it would be financially better for us to give up the Marriage Allowance.

“Thanks very much.”

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Summarising the situation, Kay Ingram, chartered financial planner and Director of Public Policy at LEBC, explains that because Janet has claimed the Marriage Allowance, 10 percent of her personal tax allowance is transferred to her husband, increasing his tax-free income by £1,250 and saving him £250 in tax each year.

With tax now being deducted due to drawing the state pension and a private pension, Ms Ingram replies: “Each person has a Personal Allowance for income on which they pay no tax,” adding this year, the standard Personal Allowance is £12,500.

“When taxable income exceeds that amount tax is charged at 20 percent on the next £37,500 of their income and higher rates once taxable income exceeds £50,000.

“A married couple or civil partnership where one has income below £12,500 and the other above this, but below £50,000, can elect to transfer 10 percent of the Personal Allowance to the higher income owner.

“This increases the tax-free income of the couple and saves £250 per year in tax for the spouse or partner with the higher income.

“If eligible the claim can be backdated four years.

“The election to transfer the allowance is made by the lower income party.

“They can reverse this if their taxable income increases above the Personal Allowance so that the whole of the allowance is restored to them, increasing their tax-free income and reducing that of their partner or spouse.

“The State pension is paid without deduction of income tax but is taxable income.

“Private pensions may pay out a lump sum which is tax free and an income which is taxable.”

Answering Janet’s query, Ms Ingram replies: “If the reader’s total annual income from her state and private pension is more than £12,500, she will owe tax on any amount over this at 20 percent.

“Once her income exceeds £12,500, she is no longer eligible for Marriage Allowance and should reverse the election she made to transfer the allowance to her husband via the Government Gateway.

“His tax will increase by £250 but she will keep more of her income tax free.

“Whether there is any tax to pay depends on the total income received over the whole tax year.

“Private pension providers automatically deduct tax at the basic rate of 20 percent from all income paid.

“This can result in too much or too little tax being paid.

“To rectify this the reader should inform HMRC of the total income she expects this year, they will then send the pension scheme the correct tax code.”

Responding, Tom O’Brien, financial planner at Brewin Dolphin, breaks down the difference between the married couples allowance and the Marriage Allowance, as well as the respective rules.

He says: “There is a married couples allowance which you can claim if you are married, living with a spouse and one of you was born before April 6, 1935.

“If married before December 5, 2005 your husband’s income is used to work out the allowance, if after this date, then highest earning income is used.

“The saving is between £351 and £907.51 off the tax liability.

“The Marriage Allowance is different, this is where you transfer some of your unused personal allowance to spouse – up to a maximum of £1,250 a year, which is a saving of £250 in tax.

“You can only claim the Marriage Allowance IF you are not using the Personal Allowance, from the question it implies you are both taxpayers and so you cannot have the Marriage Allowance and you need to inform HMRC of the change.

“If your husband is a non-taxpayer then he could give you some of his allowance.”


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