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Marriage allowance mayhem

20th Sep 2016
Tax Writer Taxwriter Ltd
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The calculation of tax following a claim for the marriage allowance is causing a range of problems for taxpayers and advisers.

Basics

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.

Conditions

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

Additional condition

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.

Later years

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.

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Replies (13)

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By kaff
20th Sep 2016 13:42

Part of the problem is likely to arise from the fact that HMRC's guidance material on Gov.UK isn't written by taxes-trained staff in HMRC, but is written by staff in the Government Digital Service whose remit is to produce content which can be readily understood by the general public. That's a laudable aim, but sometimes it seems that readability comes at the expense of technical accuracy. Unfortunately once something is on Gov.UK it can be seen as gospel by those unfamiliar with the actual legislation, including some HMRC staff and possibly software engineers who may be looking to this material to inform their work.

Thanks (3)
Jonathan@Aiteo
By [email protected]
20th Sep 2016 15:13

All of that kerfuffle for £18 a month. It really is silly.

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Replying to [email protected]:
By Duggimon
21st Sep 2016 11:36

Well exactly. From the taxpayer's point of view though it's a form that takes all of three minutes to fill in for £212 of tax savings so it's a no-brainer. It's HMRC's inability to implement anything without a huge fuss, three policy changes and a deluge of mistakes that is making it seem so ridiculous.

Thanks (4)
Replying to Duggimon:
Morph
By kevinringer
21st Sep 2016 13:28

Duggimon wrote:

Well exactly. From the taxpayer's point of view though it's a form that takes all of three minutes to fill in.

There isn't a claim form - it has to be claimed online (by the taxpayer, agents can't claim it) or phone (again taxpayer only) or SA return.
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By Andrew Lee
21st Sep 2016 11:37

We have been suffering from all of the above issues, although I have to say the very latest Tax Calculations I have received have been fully correct (both the front and back pages agree to each other, which is a first). However, our own software company, IRIS, have followed the law regarding payments on account for 2016/17 and we therefore have a difference between our own figures and HMRC's, which is very frustrating. Hopefully, this will also be resolved at some point. If this is how difficult HMRC can make such a simple relief, heaven help us when MTD is introduced. I just have no confidence in HMRC's systems or procedures at the present time.

Thanks (7)
Morph
By kevinringer
21st Sep 2016 13:26

Real life case were MA costs more tax. This is an actual client. Mr S’ income is usually lower than Mrs S so he had elected for Marriage Allowance during 2015. Both Mr and Mrs S are in self assessment. Mr S’ final income is £10285 which is well below the personal allowance of £10600. The effect of Mr S’ election for Marriage Allowance reduces his personal allowance to £9540. This generates taxable income of £745 and tax of £149. So Marriage Allowance has increase Mr S’ tax liability by £149. Mrs S’ final income for 2015-16 was £10913. Before the impact of Marriage Allowance Mrs S’ personal allowances were £10600 leaving taxable income of £313 and tax of £62.60. Marriage Allowance gives Mrs S extra relief of £212 thus reducing her tax liability to £nil. In summary before Marriage Allowance their tax liability was £nil+£62.60=£62.60. After Marriage Allowance their tax liability is £149+£nil=£149. So Marriage Allowance increases their combined tax liability of £86.40. If client had left MA claim until their SA was done it wouldn't be a problem - but client has claimed MA in advance. It now has to be disclaimed. What a lot of bother for such a small tax saving. And because agents are cut out of the MA system it is really difficult for us to deal with. It certainly increases client's costs.

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By rjwaberuk
21st Sep 2016 13:29

The transfer of an individual's own personal allowance between married couples is purely politics. It is contrary to the philosophy of "Independent Taxation"(1980? et seq). As it is also clearly not "simplification" of the tax system, OTS should do it's job and wade into Philip Hammond. If a government wants to assist the less well off (by treating individuals as a couple) use the social security system - and make it a decent amount.

Thanks (2)
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By North East Accountant
22nd Sep 2016 08:42

More complexity for no significant benefit.

Whoever thinks of this stupidity should be sacked.

Thanks (1)
Replying to North East Accountant:
rebecca cave
By Rebecca Cave
24th Sep 2016 14:11

I believe Mrs May already did that. The marriage allowance was George Osborne's idea.

Thanks (1)
Morph
By kevinringer
24th Sep 2016 14:52

I've been receiving SA302s for SA returns submitted with MA claims - the SA302s confirm my figures (so why to HMRC issue them). Now I've started receiving amended SA302s with the PA reinstated in full. I've phoned HMRC. They can't explain why the PAs have been reinstated and as far as they can tell (why don't they know for certain) the spouse is still receiving the MA. so much work for a trivial benefit. The new SA302s don't affect the "donor" of the MA because they had no tax to pay. But I'm concerned about the recipients, most of whom are on PAYE and we don't receive coding notices. The idiot who thought of this should not be sacked - they should be made to handle all our MA complaints!

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rebecca cave
By Rebecca Cave
04th Oct 2016 14:49

HMRC have now admitted that there were errors in the original software specification for the marriage allowance, as reported by ICAEW:
https://ion.icaew.com/taxfaculty/b/weblog/posts/marriage-allowance-and-s...

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By steve bird
18th Aug 2017 12:50

I applied for the Marriage Allowance and tax coded accordingly. I have since ben told I have underpaid on my tax due to allowance being withdrawn.

My wife and I appear to meet all the criteria - so why has the allowance ben withdrawn.

First I am awarded a tax overpayment refund now I am told I have underpaid due to the above.

Do all the original criteria remains valid? How can HMRC claim I have under paid due to "not being entitled to the allowance"?

Not a large sum of money involved but why should I pay more than is formally due and let the government waste it on excess and uncontrolled spend in all areas of abysmal civil management.?

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By Steven Dring
27th Sep 2018 11:12

Old post but just be careful on this one now. The legislation seems to have been updated.
FA 2014, Section 11, Chapter 3A, Point 55C (2) "The condition is that the individual’s hypothetical net income for the tax year concerned is less than the amount of the personal allowance to which the individual is entitled for that tax year under section 35 or 37."
Thus meaning any couples with one income from dividends (7.5%) the other PAYE (20%) can no longer get the benefit of transferring the PA.

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