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Transferring your Personal Allowances

By Ensors Team
12th Aug 2015

There is a new tax relief in town for some married couples and those in civil partnerships.  Although only worth a maximum tax saving of £212 for the current year, £212 is still worth having – but not without its complications.

The new relief works by allowing a qualifying couple to transfer 10% of one spouse’s/civil partner’s basic personal allowance, that may have otherwise gone unused, to their partner.  For 2015/16, the personal allowance amounts to £10,600 so the amount to be transferred is £1,060 and the tax saving is 20% of the amount transferred (£212.00).  The allowance must be “donated” by the non-taxpaying spouse / civil partner – it cannot be “claimed” by the other.  The donation is by means of a formal election made before, during or up to four years after the tax year concerned.

To qualify, the following must apply:

  • Both of you must have been born on or after 6 April 1935 (you get a better Married Allowance if you are 80 or older);
  • You must be married or in a civil partnership for the whole or part of the year;
  • One of you needs to have income of £10,600 or less (plus up to £5,000 of the new tax-free savings interest allowance for 2015/16 onwards);
  • The other one of you needs to be a basic-rate taxpayer (Couples with a higher or additional rate taxpayer cannot qualify);

In essence, if you are employed, upon receipt of a successful claim, the recipient receives relief through an adjustment to their PAYE code and thus receives the £212.00 maximum through the pay-packet.  If you are under Self-Assessment, relief is given through a reduction in the amount you pay direct to the Collector of Taxes

The above seems to be a relatively straightforward relief and you can register your interest with HMRC at www.gov.uk/marriage-allowance or by calling HMRC direct.  HMRC then invite you via email (note this is possibly one of the only times you will hear from HMRC via email) to formally make a claim, but is currently taking up to 14 weeks to send out an invite after you have registered.

The relief is an all-or-nothing amount of 10% of the Personal Allowance.  Where the donor has income in the range £9,540 – £10,600 (i.e. above 90% of the personal allowance) things start to become a little more complicated.  In this case, the recipient still gets the £1,060 allowance being transferred but because the donor’s allowance is now reduced to £9,540 (i.e. 90% of the full allowance), they will receive a tax bill from HMRC after the end of the year because their income is now not fully covered by their reduced allowance.  As a couple, you will still benefit, but the net saving to you is now less than the full £212.00.

Equally, tax bills can occur when the recipient expects to be a basic rate taxpayer but then actually just crosses into the 40% bracket in which case the election is cancelled.  (Non-residency, divorces, dissolutions of civil partnerships and death can all add complications too).

The timing of an election is also important.  If the election is made after the tax year to which it relates (but before the four year time limit), it is only valid for that particular tax year and not subsequent ones.  If you make the election during or before the tax year, it remains in place for later years until withdrawn or cancelled.

Should circumstances change, for example one of you becomes a higher rate taxpayer or the recipient has insufficient income to use the allowance, the election ceases to have effect for subsequent years. Here a new election will have to be made to restart future transfers for subsequent years.  If the recipient spouse is frequently borderline as to whether they pay tax or not, the writer can see elections being made, then cancelled by HMRC, and then having to be re-made for future years.  Alternatively, you could merely wait until after each tax year has ended and decide then whether or not it is possible to make a retrospective election each year in isolation.

(This is, of course, assuming that the donor spouse / civil partner wishes to give away unused personal allowances in the first place… but that question is outside the scope of this article!)

The new ability to transfer potentially unused Personal Allowances is to be welcomed but certainly this new relief is not currently without its teething problems.  If you can bear the additional paperwork, £212.00 is still worth having.

For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.