The Marriage Allowance, a financial benefit designed for married couples and civil partners, is causing unexpected tax headaches for thousands of pensioners. Lovemoney published a breakdown of what’s happening and why it matters.
What is the Marriage Allowance?
The Marriage Allowance is a tax relief measure allowing lower-earning partners to transfer a portion of their Personal Allowance to their higher-earning spouse or civil partner. The Personal Allowance is the amount you can earn before being taxed, currently set at £12,570 in the UK.
How Does It Work?
If your earnings are below the Personal Allowance threshold, you can shift up to £1,260 to your partner. This transfer can boost the higher earner’s Personal Allowance to £13,830, potentially saving them up to £252 in Income Tax annually. However, the higher earner must be a basic rate taxpayer, earning less than £50,270.
Pensioners in a Tax Bind
Pensioners are not excluded from the Marriage Allowance. It’s beneficial if one partner has a significantly larger pension income, yet still within the basic tax bracket. But, as former pensions minister Steve Webb highlights, complications arise when the State Pension increases.
The State Pension Increase
Next year, the State Pension is set to rise to about £11,542, a substantial 8.5% hike. This poses a problem for the lower-earning partner who transferred part of their allowance. Their remaining Personal Allowance drops to £11,310, less than the new State Pension. Consequently, they face an unexpected tax bill on the difference.
Couples in this predicament have two options: continue with the allowance and face annual tax payments, or stop claiming the allowance, which might lead to overall financial loss. Webb warns of “Marriage Allowance mayhem,” affecting a significant portion of pensioners.
The Bigger Picture
With around one-third of the 2.1 million couples benefiting from the Marriage Allowance being pensioners, hundreds of thousands could face surprise tax bills. This isn’t the first warning for pensioners about tax issues due to the State Pension increase. Those with additional personal pension income might also need to pay tax.
The Personal Allowance Freeze
Chancellor Jeremy Hunt has frozen the Personal Allowance threshold until 2028. This freeze is effectively a stealth tax, as income increases over time will push more people into higher tax brackets. The Office for Budget Responsibility estimates a significant rise in Basic Rate taxpayers by 2028-29, including many pensioners.
This freeze means more individuals, particularly pensioners, could inadvertently exceed the Marriage Allowance limits. While financially beneficial for the Treasury, it spells increased stress and administrative burden for millions.