The Government and HMRC continue to highlight that around one quarter of entitled couples have not claimed the allowance which was introduced in 2015/16. Now may be a good time to ensure whether they can claim this relief. References to marriage also include civil partnerships.
As you will know, broadly an individual is entitled to a tax reduction for a tax year at the basic rate of tax on the transferable amount if a claim is made and:
- the individual is married to a person who makes an election which is in force for the tax year;
- the individual is not, for the relevant year, liable to tax at a rate other than the basic rate, the dividend ordinary rate or the starting rate for savings;
The transferable amount is currently £1,190. If an individual is entitled to a tax reduction, the personal allowance of the individual’s spouse is reduced accordingly. If an individual who is entitled to a tax reduction for a tax year dies during that year, this rule is ignored.
HMRC guidance misleading
HMRC’s guidance implies that the rules only operate where one of the spouses is a non-taxpayer but this is just wrong. The rules apply where neither spouse is a higher-rate taxpayer. This would include considering issues such as pension contributions, Gift Aid donations and the savings allowance.
In addition, due to the changes in the rates of tax on dividends, life has become more interesting or complicated depending on your take on things.
Consider a situation where Mark runs his own company and extracts £9,000 salary and £33,000 of dividends. His prevailing rate of tax is 7.5%. His wife Marie earns £42,000 in employment. Her prevailing rate of tax is 20%.
As neither spouse is a higher rate taxpayer a claim should be made to transfer some of Mark’s personal allowance to Marie, creating a net saving to the couple. This is due to the fact that relief is on a specific monetary amount, not at a rate of tax.
Of course, this makes life no simpler but whoever said that tax was simple!