Marriage allowance mayhem
The calculation of tax following a claim for the marriage allowance is causing a range of problems for taxpayers and advisers.
The marriage allowance is not a separate allowance; it is a reallocation of 10% of the personal allowance from one person in marriage (or civil partnership) to the other. It should not be confused with the married couple’s allowance which is a separate allowance available to married couples (or civil partners) where at least one person was born before 6 April 1935.
Where spouse or marriage is referred to below it equally applies to civil partner or civil partnership.
A person may elect to transfer 10% of their personal allowance to their spouse if all of the following apply for the tax year:
- The couple were married for at least part of the year, and were married at the date of the claim for the marriage allowance
- The transferor is not liable to tax at a rate other than the basic rate, the dividend ordinary rate or the starting rate for savings
- The recipient not liable to tax at a rate other than the basic rate, the dividend ordinary rate or the starting rate for savings
HMRC has stipulated (on GOV.UK) that to benefit from the marriage allowance the transferor must have total income (for 2016/17) of no more than £11,000 plus up to £5,000 of interest.
This condition for the marriage allowance is not in the legislation, but it does appear to have been coded into the HMRC computer systems. It may not disadvantage the couple concerned, but in some cases it will. The ICAEW Tax Faculty has raised this point with HMRC.
Effect on recipient
The recipient of the allowance should be given a tax reduction of £212 for 2015/16 (20% x £1,060). Where the claim is made after the tax year end, this adjustment should be shown as a tax reducer on form SA302 or on the P800 for the year.
However, in some cases the HMRC computer adds £212 to the recipient’s tax calculation for 2015/16. The only way to resolve this error is to contact HMRC for the particular taxpayer, and ask for the taxpayer’s assessment to be adjusted.
Effect on transferor
The transferor has their personal allowance reduced by £1,100 for 2016/17 (£1,060 for 2015/16). This should have no effect on their tax position if they have ‘spare’ allowance of at least £1,100 to surrender. However, if the taxpayer’s income is greater than the personal allowance due to dividend income, an unexpected tax charge may be the outcome as AccountingWEB member snickersinatwist discovered.
In this case the transferor had earned income for 2015/16 of £9,400 and dividend income of £3,000 gross. Before the transfer of the marriage allowance their tax liability was nil, as the dividend tax credit covered £1,800 of dividends taxed at 10%. After the transfer of the marriage allowance, the remaining allowance of £9,540 is set first against the earned income and then against the dividends, leaving £2,860 (£3,000-£140) of gross dividend taxed at 10%. That dividend income should be covered by the dividend tax credit leaving a tax liability of nil.
However, the HMRC computer taxed £1,800 of dividends at 10%, then added tax of £212 (labelled marriage allowance) before deducting £300 of dividend tax credits. This left the taxpayer with a liability of £92 not nil! The HMRC result is clearly nonsense, but the call centre operatives at HMRC could not understand the problem.
Where the claim for the marriage allowance is made after the end of the tax year, (say on the 2015/16 tax return) the claim is valid only for that one year. The payments on account for 2016/17 should not be affected. However, that is not how HMRC has interpreted the law, and how it has instructed the software providers to produce computations.
If a claim for the marriage allowance was made for 2015/16, most tax software has reduced the payments on account for the recipient of the allowance for 2016/17 by £220 (20% x £1,100). HMRC appears to have changed its approach to this issue part way through 2016/17 as discussed by AccountingWEB members John Stone and Basil.
What it means for MTD
It is clear that HMRC has read conditions into the tax law for the marriage allowance which do not exist, and those conditions have been incorporated into the software standards provided to the software producers. The resultant errors affect low paid taxpayers and they are time consuming for tax agents to correct.
I highlighted a similar problem which manifested itself in loss relief calculations in 2015. At that time I was worried that similar errors would occur, and they have. There is a real danger that such errors will multiply under making tax digital. It will also be very difficult to challenge them.
My solution is to require the tax software standards produced by HMRC to be audited by an independent standards body, such as the British Standards Institution (BSI). The audit would check that the software standards are aligned with the letter of the tax law, and that approved tax software conformed to those standards.