Despite the name, this is open to couples who are either married or in a civil partnership. It is only beneficial if one of you earn less than the Personal Allowance which for the 2020-21 tax year was £12,500.
Therefore, if you (or your partner) earns less than £12,500 this is something you can make use of.
It benefits the couple, as the person who is earning less than £12,500 can transfer 10% of their Personal Allowance to their partner. Thus the partner benefits by having not £12,500 but £13,750 of tax free earnings, which offers a tax saving of around £240 per year.
HMRC also allow you to reclaim this for the previous four tax years, therefore if this is not something you are currently making use of, there is potentially a £1,000 tax refund waiting for you to claim!
Example – one partner below the Personal Allowance
Your partner’s income is £7,000 and their Personal Allowance is £12,500, so your partner does not pay any tax – they aren’t actually making full use of their Personal Allowance.
Your income is £20,000 and your Personal Allowance is £12,500, so you pay tax on £7,500. This means that as a couple you are paying Income Tax on £7,500.
When you claim the Marriage Allowance your partner transfers £1,250 of their Personal Allowance to you. Your partner’s Personal Allowance becomes £11,250 (but still more than what they earn) and you get a ‘tax credit’ on £1,250 of your taxable income (that £7,500 from earlier).
This means you will now pay tax on £6,250, and not £7,500. Instead of paying around £1,498 in Income Tax, you’ll now pay around £1,227 – saving of £271, every year!
Example – one partner close, but below, the Personal Allowance
This is less straight forward. But as a couple, you are better off!
Without the Marriage Allowance
Let’s assume that your partner earns £12,000, with their Personal Allowance of £12,500, they pay no income tax. Let’s assume you earn £20,000, with your Personal Allowance of £12,500, you pay tax on £7,500 or around £1,498 in Income Tax.
Therefore as a couple you pay a total of £1,498 in Income Tax.
With the Marriage Allowance
If your partner transfers £1,250 from their Personal Allowance over to you, let’s now consider the combined total Income Tax paid as a couple.
Your Partner still earns £12,000, but their Personal Allowance is now reduced to £11,250. They now pay Income Tax on £750 – but only at 19%. Around £48 in Income Tax.
Your £20,000 salary, but with the tax credit of £1,250 reduces your Income Tax to £1,227 (just like the first example).
Combined, with your partner paying £48 and you paying £1,227, a total Income Tax of £1,275. A couple saving of £223.
So when one partner is close, but below, the Personal Allowance, the tax savings aren’t as good, but a £223 saving every year is still something which you should be making use of.
If you would like Self Assessment Scotland it file the necessary paperwork to not only claim the potential £1,000 tax refund for the past four years, but to set you up with HMRC to benefit in every future year, please get in touch.