Lee Sharpe points out that the new so-called Marriage Allowance is not quite what it seems – but that could be good news for some family companies.
I’m going to let you into a little secret: much of what you have read about the new Marriage Allowance – particularly if you’ve read HMRC’s guidance on it – is utter cobblers. Unfortunately, that guidance is then propagated by other intermediaries as gospel. There is potentially some good news in all this for some married couples, particularly where each spouse has dividend income, so strap in…
This straight from HMRC’s guidance: (www.gov.uk/marriage-allowance/how-it-works)
‘Marriage Allowance lets you transfer £1,100 of your Personal Allowance to your husband, wife or civil partner - if they earn more than you.
This reduces their tax by up to £220 in the tax year (6 April to 5 April the next year).
To benefit as a couple, you (as the lower earner) must have an income of £11,000 or less. You can calculate how much tax you’ll pay as a couple.
Who can apply
You can get Marriage Allowance if all the following apply:
• you’re married or in a civil partnership
• you don’t earn anything or your income is under £11,000
• your partner’s income is between £11,001 and £43,000’
The bits in bold are simply incorrect
For the record
Pretty much the only thing that HMRC has got right about the Transferable Tax Allowance (TTA) for Married Couples and Civil Partners (its official title) is that you must be married (or in a civil partnership). For those who are tax-resident in the UK:
- there is no requirement that the applicant must earn less than the spouse or civil partner;
- the applicant does not have to earn less than the current Personal Allowance of £11,000. Simply put, so long as giving up the £1,100 in Personal Allowance does not make them Higher Rate taxpayers, (or relying on the new ‘Dividend Allowance’ not to be), they they’re fine. (ITA 2007 s 55C); and
- the ‘beneficiary’ of the election (‘your partner’ above) does not in fact have to earn less than £43,000. Simply put, they too must not be Higher Rate taxpayers, or relying on the new ‘Dividend Allowance’ in order not to be. (ITA 2007 s 55B)
Note: I did not mention the ‘Higher Rate Threshold of £43,000’. That is because the legislation doesn’t either. This is not a mistake: the legislation for the new Allowance has had to be reviewed in light of the new Savings and Dividend so-called ‘Allowances’ (that are in fact nil-rate bands) and it seems the government is happy with the basic mechanism.
- pension payments and Gift Aid contributions will increase the limit; and
- while you cannot rely on the new Dividend Allowance to keep you out of trouble, the new Savings Allowance is fine. (ITA 2007 s 55C (1) (c) as updated for the new savings nil rate by FA 2006 s 4 for the applicant; likewise, for ITA 2007 s 55B (2) (b) for the benefiting partner; s 5 (6) & (7) stop the new dividend nil rate from allowing you to exceed the Basic Rate Limit).
HMRC seems to struggle with the relationship between tax reliefs, allowances and tax reductions. I have twice checked that HMRC agrees that the legislation permits each spouse to elect in favour of the other in the same tax year. HMRC did agree, and they were pleased to agree, because it provided a ‘get-out clause’ in the relatively rare – but not impossible – scenario where an election might actually cost the couple tax overall. But it was clear that they hadn’t really thought it through.
Very simply put, the applicant sacrifices 10% of his or her tax-free Personal Allowance, worth £1,100 in 2016/17, so that the benefiting partner can claim a tax reduction equivalent to 10% of the Personal Allowance – £220 in 2016/17. In an ideal world, that would mean that a married couple will be up to £220 better off – say where one spouse has no income, and the other earns £30,000 a year. Of course, it would be pointless if both spouses / civil partners were earning, wouldn’t it?
Actually, no - because an allowance and a reduction are not the same.
Best of both worlds
Let us assume that Richard and Rupert are in a civil partnership. Richard has his own software consulting company, while Rupert is a co-director/25% shareholder in a firm of architects, with several employees.
To recap, and assuming these are the only sources to each spouse:
Richard is taking £650 per month in salary and £2000 a month in dividends, so £7,800 and £24,000 annually, respectively. Richard is not a Higher Rate taxpayer, nor will he be if he gives up 10% of his Personal Allowance, equivalent to £1,100.
Rupert is taking exactly £8,060 in annual salary and £36,000 in dividends, totalling £44,060. As this is more than the Higher Rate Threshold of £43,000, this would ordinarily make Rupert a Higher Rate taxpayer already, but he also makes a personal pension contribution of £150 a month, which is grossed up on his tax return to £2,250. His Basic Rate Limit is increased by £2,250 so his Higher Rate threshold is £45,250.
Rupert is, therefore, also not a Higher Rate taxpayer. Furthermore, he could now also lose £1,100 of his Personal Allowance and still be just beneath the Higher Rate threshold, as adjusted to reflect pension contributions.
If Richard elects to transfer his ‘Marriage Allowance’ to Rupert, then his Personal Allowance will fall to £9,900. His salary is £7,800 so the reduction in Personal Allowance will make more of his dividend income taxable, at 7.5%. He has a real tax cost as a result, but it is only £1,100 x 7.5% = £82.50.
Rupert, however, is entitled to a tax reduction of £1,100 @ 20% = £220. He does not get Richard’s Personal Allowance – that is not how the legislation works. He gets a tax reduction of £220, as fixed in the legislation. The only thing that can restrict his tax ‘credit’ is if he has not already paid £220 in tax, that HMRC can then credit or repay. Thanks to the new dividend regime, Rupert has oodles of tax to pay, albeit at only 7.5% (a little over £2,100).
So, Richard has paid £82.50 for Rupert’s tax saving of £220 – a net saving of £137.50. This much, I think, HMRC can keep up with, although you might not think so from their guidance. But why stop there?
Double or quits?
Rupert now elects to transfer some of his Personal Allowance to Richard. There is nothing in the TTA legislation to prevent this. This is not a cancellation of Richard’s election but a fresh election, just in the opposite direction. HMRC has already confirmed this can be done. Since Richard is in a very similar situation to Rupert, he too will get a tax reduction of £220, at a cost to Rupert of just £82.50.
All in all, a net tax saving of £275. Not bad, for a few minutes’ work. Rupert should probably put his saving into boosting pension contributions, just to be on the safe side, because he is very close to the Higher Rate Threshold.
I find that the new TTA is not well understood, and some of the blame for that must surely fall on HMRC’s abysmal guidance on how it works. It is also, admittedly, only a modest saving, that would not exactly have clamoured for careful scrutiny by tax professionals. One or two things I am almost certain of is that:
- HMRC’s systems will not be able to handle cross-elections, and
- they will try to say it is abusing the legislation.
To which I would say that, if only HMRC had read and understood the legislation properly in the first place, they would realise that it was clearly intended to give people the opportunity to transfer Personal Allowances when ‘earning’ a lot more than just £11,000, and they have already accepted that cross-elections are possible. It is only the introduction of the new, more expensive, dividend regime that makes this manoeuvre worthwhile, and we hardly asked for that! Whether or not taxpayers or their advisers think that the £275 tax saving is worth the possible challenge, is something for them to discuss, but at least they are now aware of the opportunity.
This article was first printed in Business Tax Insider in February 2017.