Marriage allowance – ‘til higher rate tax us do part

11 June 2024

Since April 2015, some married couples and civil partners have had the opportunity to take advantage of tax relief accessible through the marriage allowance. The marriage allowance is available where one spouse or civil partner earns below their personal allowance and the other is a basic rate taxpayer. It allows the lower earner to transfer up to 10% of their tax-free personal allowance to their other half. For some, the tax saving could be worth £252 per year.

Claimants of the marriage allowance have increased since its introduction, with an estimated 2.28 million claims being made during the 2021/22 tax year. With inflation and fiscal drag, increasing numbers of taxpayers are being pulled into higher tax bands and becoming subject to higher rates of tax. 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 would 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 HMRC processing these claims correctly. This has resulted in some couples being initially denied tax relief on the grounds that the recipient spouse was earning over the basic rate tax band, despite them only paying tax at the basic 20% tax rate. 

Where an individual earns over the basic rate tax threshold, (presently £50,270, although a lower threshold of £43,662 may apply to Scottish resident taxpayers), the income exceeding this amount is usually taxable at the higher rate of tax (currently 40% or 42% for Scottish resident taxpayers). This is not the case when a personal pension contribution or gift aid donation is made, as these payments extend an individual’s basic rate band by the amount of the gross contribution or donation, allowing more income to be taxable at 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 on earnings of up to £52,145.

The legislation states the recipient of the personal allowance transfer needs to be an individual who ‘pays tax at the basic 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 agents. In one HMRC forum, different agents appear to contradict each other, and it’s left to the taxpayer to try and clear up the position.   

Whilst the guidance from HMRC on this subject may be unclear to taxpayers, the legislation appears 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.

Emma Newsome
Emma Newsome
Tax Associate
AUTHOR
Emma Newsome
Emma Newsome
Tax Associate
AUTHOR