Hundreds of thousands of women pensioners face being hit with an unexpected bill due to the freezing of tax thresholds. The issue affects couples that are claiming Marriage Tax Allowance.
Marriage Tax Allowance allows eligible couples to transfer £1,260 of their personal allowance to their spouse or civil partner to cut their yearly tax bill. Your personal allowance is the amount you can earn tax-free each tax year - the standard rate is currently £12,570 before you start paying tax.
You need to be married or in a civil partnership to claim Marriage Tax Allowance, and both of you must also have been born on or after April 6, 1935. One of you also needs to be a non-taxpayer while the other person needs to be paying the basic 20% rate of tax.
The latest figures from the Government suggest around 2.1m couples benefited from Marriage Tax Allowance in 2020/21, and just over one in three of these are estimated to be pensioner couples. In most cases, the husband will be the taxpayer and the wife will have the lower income and be a non taxpayer.
Until now, many wives could freely hand over 10% of their allowance because their taxable income was below 90% of the full allowance, or £11,310. However, research from LCP shows increases in the state pension, along with the freezing of the Income Tax threshold, means more of these women will be dragged above the 90% threshold.
The new state pension rose by 10.1% this year. If it rises by 8.5% next April, it will be worth around £11,500 per year, or around 91.5% of the full personal allowance. If the woman takes no action, she will have to pay a small tax bill, as she only has an allowance of £11,310 and an income of £11,500. She would pay tax on the difference.
Couples will either have the choice of carrying on with the Marriage Tax Allowance, and paying the small tax bill, or cancelling the Marriage Tax Allowance, which would increase the tax bill of the husband and potentially leave them worse off.
Steve Webb, partner at LCP said: “This is yet another unwelcome by-product of the year-on-year freeze in the value of the tax allowance. Hundreds of thousands of women have signed over part of their tax free allowance in order to reduce their husband’s tax bill.
“But as the state pension rises many of these women may now find they end up with an unexpected tax bill. We could see marriage allowance ‘mayhem’ as hundreds of thousands of couples have to decide whether to carry on with this arrangement or cancel it, to avoid low income pensioners being dragged into the tax net. The sooner the freeze on tax allowances comes to an end, the better.”