Marriage allowance – ‘til higher rate tax us do part

Since April 2015, some married couples and civil partners have had the opportunity to claim additional tax relief through the marriage allowance. The marriage allowance is available where one spouse or civil partner has income below their personal allowance and the other pays tax at the basic rate (or the starter, basic or intermediate rate in Scotland). It allows the individual with the lower income to transfer up to 10% of their tax-free personal allowance to their spouse or civil partner. For some, the tax saving could be worth £252 per year.

The number of claimants of the marriage allowance has increased since its introduction, with an estimated 2.28 million claims being made for the 2021/22 tax year. However, inflation and fiscal drag are pulling increasing numbers of taxpayers into higher tax bands. The Office for Budget Responsibility estimates 1.4 million people have been brought into the higher rate tax band for the 2023/24 tax year. Any individuals in this category previously claiming the marriage allowance will no longer qualify, unless they take measures to extend their basic rate tax band, perhaps by making gift aid donations or personal pension contributions.

Despite the importance of such a relief for lower earning families in an economy with constantly rising costs, we have seen some couples experiencing issues with incorrect processing of these claims by HMRC. This has resulted in some couples being initially denied tax relief on the grounds that the recipient spouse’s income fell into the higher rate tax band, despite them not paying tax at that rate. 

Where an individual’s income exceeds the higher rate tax threshold (generally £50,270 for 2024/25, although a lower threshold of £43,662 applies to the earned, pensions and property income of Scottish resident taxpayers), income immediately above this amount is taxable at the higher rate of tax (40%, or 42% for Scottish resident taxpayers on relevant income sources). This may not be the case when an individual makes a personal pension contribution or gift aid donation, as these payments extend the individual’s basic rate tax band by the amount of the gross contribution or donation, allowing more income to be taxable at the basic rate. 

For example, an English resident individual earning £52,000 would usually pay 0% income tax on their first £12,570 of income, 20% income tax on the next £37,700 of income, and 40% on the remaining £1,730, thus making the individual a higher rate taxpayer. However, a gift aid donation or net personal pension contribution of £1,500 may extend the individual's basic rate tax band by up to £1,875, meaning the individual would not incur higher rate income tax until their earnings and/or other income exceed £52,145.

The legislation states that, where a claim is made for marriage allowance, the recipient of the personal allowance transfer needs to be an individual who is liable to tax at a rate below the relevant higher rate. Using this logic, the individual in the above scenario would remain eligible as a recipient for the marriage allowance transfer, provided their spouse or civil partner had total taxable income of less than £12,570. 

Taxpayers are increasingly being directed to HMRC’s online services for help and advice on their personal tax position. It seems that confusion over the marriage allowance rules extends to some of HMRC’s digital forums. In one HMRC forum, different HMRC respondents appear to contradict each other, and it’s left to the taxpayer to try and understand what is clearly a complicated issue.   

Whilst the guidance from HMRC on this subject may be unclear to taxpayers, the legislation appears relatively straightforward to interpret. If taxpayers find their marriage allowance claim has been denied and believe there are grounds for challenging this, persistence may ultimately pay off. The challenge is the time involved in doing so. Some may give up, potentially leaving themselves hundreds of pounds out of pocket.