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Did you know that, in 2021-22, there are still tax benefits to being married or in a civil partnership? One of the lesser-known advantages is the Marriage Allowance – which lets one spouse transfer up to £1,260 of their personal allowance to the other person. Yet how does this work, exactly? Who could benefit from it and what other tax advantages are available in the current tax year? Below, our team at WMM addresses these questions.
What is the marriage allowance?
Each financial year, every UK resident is entitled to a £12,570 tax-free personal allowance on their income. For instance, if you earn a £30,000 salary, then the first £12,570 is not taxed. The remaining £17,430 will be subject to the 20% Basic Rate, resulting in a £3,486 tax bill.
The advantage of the Marriage Allowance is that it can help a household save, overall, on their income tax. This is available to married couples (or civil partners) usually when one person earns less than their £12,570 personal allowance each year. This person can then “transfer” up to £1,260 of their allowance to the other person – potentially saving £252 for the tax year.
For instance, suppose your spouse earns £10,000 a year – i.e. less than the £12,570 personal allowance. You earn £40,000 per year, meaning that your “taxable income” is £27,430 (i.e. £40,000 minus £12,570), resulting in a £5,486 income tax bill for your household. Your spouse then claims Marriage Allowance which lets them transfer their unused allowance to you.
This effectively changes your personal allowance to £13,830 and so changes your taxable income to £26,170, leading to a £5,234 income tax bill – a £252 tax saving.
Other tax advantages
It might seem unfair to unmarried people that the Marriage Allowance does not also benefit them. Here, we are not trying to make a moral argument but rather help couples discern the tax landscape to help them save on needless taxes.
There are at least two other areas of tax where marriage and civil partnership “pays”. First of all, such couples enjoy an inheritance tax (IHT) exemption when one person dies and passes their estate to their surviving spouse. For instance, a husband dies leaving a £500,000 estate to his wife – which is passed over to her, tax-free.
This tax benefit is not available to unmarried couples even if you have lived together for many years and have had children together.
Secondly, married couples can transfer over “unused allowances” to each other in a given tax year. In particular, married couples do not pay capital gains tax (CGT) on assets which they sell (“dispose”) to their spouse for a gain. This can result in a significant tax saving for a married couple if one person has already used up their £12,300 tax-free yearly CGT allowance.
For instance, suppose the wife in a couple has recently sold shares in her general investment account (GIA) and is close to her £12,300 aforementioned allowance. She wishes to sell more of her investments. Her husband has not used any of his annual tax-free CGT allowance, so she sells the shares to him. He promptly disposes of them, allowing them to keep the profits as a couple whilst mitigating their overall CGT bill.
Similarly, married couples and civil partners can mitigate taxes on their dividends. In 2021-22, each person is entitled to earn up to £2,000 in dividends each year, tax-free. By selling certain dividend-generating shares to a spouse who has not used their allowance, therefore, a couple can save on their overall dividend tax.
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Interested in finding out how we can optimise your financial plan and tax strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469
