Are you missing out on extra tax free income?
Each year as an individual we have a personal allowance which is the amount of income we can earn and pay tax at 0%, effectively meaning the income up to this limit is tax free. This personal allowance is currently £12,570 and is fixed up to and including the tax year 2027 - 2028. So this effectively means that an individual can earn up to £12,570 per year and not pay tax on this amount. Earnings above this limit are taxed depending on the tax bracket the earnings fall into as per the below: - Non tax payer - £0 - £12,570 per year
of earnings
- Basic rate taxpayer (20%) - £12,571 £50,270 per year of earnings
- Higher rate taxpayer (40%) - £50,271 £125,140 per year of earnings - Additional rate taxpayer (45%) £125,140+ per year of earnings
But how am I missing out?
As a married couple or if you’re in a civil partnership if one of you earns less than £12,570 per year then the marriage allowance lets the lower earner transfer some of their personal allowance to their husband, wife or civil partner.they can transfer a maximum of £1,260 which would reduce their husband, wife or civil partners tax by up to £252 in the tax year.there is a caveat that the higher earners income must be below £50,270 per year.
Example
Bob is retired and earning £20,000 per year in pension income, of this he is taxed as below:
- The first £12,570 of earnings at 0% =
£0 tax
- The remaining £7,430 of earnings at
20% = £1,486 tax
Therefore Bob pays a total of £1,486 in tax.
His wife Sally is not yet retired but still works part time earning £7,000 per year. As this is under the £12,570 personal allowance this means Sally pays no tax. As Sally is not using all her personal allowance she can transfer a maximum of £1,260 to Bob making Bob’s personal allowance his £12,570 + £1,260 giving him a new personal allowance of £13,830. Lets look at Bobs tax bill now that Sally has transferred her personal allowance:
- The first £13,830 of earnings at 0% =
£0 tax
- The remaining £6,170 of earnings at
20% = £1,234 tax
As you can see Bob has now saved £252 in tax for the tax year.
How do I apply
First of all it is free to apply and you do so directly with HMRC. If you visit www.gov.uk/marriage-allowance this will provide you with further information and how to apply. It’s also worth noting that you are able to backdate your claim to include the previous 4 tax years if you were eligible for marriage allowance but did not utilise it.
Once you’ve transferred your marriage allowance it will automatically continue to transfer each tax year until you cancel it so it’s important that you contact HMRC if your circumstance change which could be that you’re no longer eligible due to a change in income or your relationship ends.
At Brian Mole IFA Ltd we help many people transition into retirement and being tax efficient is very important, marriage allowance if eligible is a small gain that can be made whether in retirement or still working and should be taken advantage of if you’re able to.