Matt Bailey, founder of Gbooks, looks at what the marriage allowance is, when it can be claimed and the complications of which accountants need to be aware.
As part of its latest digital plans, HMRC recently unveiled its first live data feed (or API), allowing software providers to check a taxpayer’s marriage allowance status. This move has put the marriage allowance back on the agenda, or at least reminded practitioners that the tax break exists and is available as they complete 2015/16 tax returns.
Marriage allowance – the basics
The marriage allowance allows a low-earning taxpayer to transfer up to 10% of his or her personal allowance (PA) to their spouse or civil partner. To be eligible the transferor must have income below the PA threshold, and the recipient must not be liable to tax at any rate other than the basic rate, the dividend ordinary rate or the starting savings rate. The happy couple must either be married or in a civil partnership for the whole or part of the tax year concerned, and at the time the election is made.
How to claim
Taxpayers can either claim by contacting HMRC direct or via their self-assessment tax return. This is relevant for accountants, as your clients may already be receiving the allowance via an amended PAYE tax code. If the couple made a claim they will have received new tax codes ending in either M (for the recipient) or N (for the transferor). So it is worth looking out for these letters when examining P60s or P45s.
Claims to transfer part of a taxpayer’s PA can also be made on the tax return by filling in the “Marriage Allowance” section on page 5. No action is required if a taxpayer is receiving the transfer, and the claim will not be included in their tax return or tax calculation. Instead HMRC will make a separate adjustment after receiving the tax return, and if necessary will contact the taxpayer to issue a refund.
Ceasing to claim
A taxpayer claiming marriage allowance may cease to be eligible due to changes in income levels, divorce or death. When and how the allowance is withdrawn depends on the reason and also how the allowance is being claimed.
Taxpayers get a slightly better deal if they receive the allowance via the PAYE system. Once claimed, HMRC will automatically roll the claim into subsequent years as long as the couple continue to obtain a tax advantage. If a partner ceases to be eligible due to a rise in income, the relief is withdrawn as from the start of the following tax year.
If the couple divorce they have the option of continuing the claim until the end of the year, although the transferor can opt for the claim to be cancelled from the start of the tax year in which the decree absolute (or equivalent) was made.
There doesn’t seem to be the same flexibility or time lags if the allowance is claimed via the tax return. Each claim is made on a single-year basis, and the taxpayers will need to meet the basic criteria for that year. So they will need to meet the income conditions, and still be married or in a civil partnership when the claim is made (i.e. when the tax return is submitted).
If one member of the couple dies there are further twists. If the recipient dies, his or her estate will keep the higher PA for that tax year but the transferor’s PA will be reset to the normal level. If the transferor dies the claim will remain in place as normal for that year, with both PAs staying at their enhanced or reduced levels. This treatment (or at least the treatment where the recipient dies) is set out in the legislation, so should apply regardless of whether the claim is given via the PAYE system or the tax return.
The marriage allowance may not be the biggest tax break in the world, but it is free money for some taxpayers and should not be wasted. There are complications in terms of the eligibility criteria, and in how claims are made, processed and withdrawn by HMRC, so accountants will need to be aware of the bells and whistles involved.
About Matt Bailey
Founder of Azura Cloud Systems (Gbooks), the leading cloud-based tax and accounts system.