Payroll Services and the Marriage Tax Allowance

The Marriage Tax Allowance – Millions are Missing Out

As Payroll Services specialists we’re often asked if there are any easy – and legal – ways of increasing take home pay. The answer is yes: The Marriage Tax Allowance. If you’re married, or in a civil partnership, then the government’s Marriage Tax Allowance introduced in April 2015 could provide a tax break of up to £220 (in the current 2016/17 tax year) for doing nothing other than applying for it. And yet it is estimated that over 3.5 million of the 4.2 million eligible couples are missing out because they haven’t applied. So here’s our quick guide.

Who is eligible?

  • Only married couples or those in a civil partnership, where both are born on or after 6th April 1935.
  • One member of the couple needs to be a non-tax payer (i.e. earning less than the current 2016/17 personal tax free allowance of £11,000).
  • The other member of the couple needs to be a basic 20% tax payer, earning more than £11,000 but less than £43,000 per year in 2016/2017.

So if you fit the above criteria, then you are eligible. It’s that simple, and yet millions haven’t applied.

 How does it Work?

Put simply, the person who does not pay tax because their earnings are below the £11,000 personal allowance threshold (above which income tax kicks in), can transfer 10% of their personal allowance – £1,100 in the current 2016/17 tax year – to their spouse’s/civil partner’s personal allowance.

The key point is that it is only £1,100 that can be transferred. Not more or less. Essentially it increases the tax payer’s personal allowance by £1,100 (to £12,100), meaning they pay 20% tax on £1,100 less of their earnings, a saving of up to £220. It does also, effectively, reduce the non-tax payer’s personal allowance to £9,900, so the full benefit of £220 will not accrue if the non-tax payer earns between £9,901 and 10,999..

For example, if the non tax payer’s earnings are £10,500 per annum, then the amount of unused personal allowance is £500. However in this scheme, £1,100 is the only amount that can be transferred, and it effectively reduces the non-tax payer’s allowance to £9,900, who now earns £600 above the nominal allowance, on which tax must be paid at 20% – £120.

The partner still benefits by £220, but the net gain for the couple is £100. In other words it is still worth doing.

How to Apply. It’s Easy, But……………..

You can apply via HMRC’s on-line application form, and you’ll need both National Insurance numbers along with ID. You can also call them on 0300 200 3300 and sort it out over the ‘phone. However, it is the non-taxpayer who must apply to make the transfer, not the other way around.

If you are eligible, you’ll be notified by email. Also, if you were eligible from when the scheme started in 2015/16, then you can receive a payment backdated to that year. In fact, backdating is allowed for 4 years, so if you get to 2019 and apply then and you qualified for all of the previous 4 years to when the scheme started in 2015/16, backdating applies.

There are one or two very niche scenarios when this is not worth doing, where, for example, the non-tax payer earns just below the threshold and the tax-payer earns just above the threshold. For example:

  • If the non-tax payer earns £10,900, then transferring the £1,100 of personal allowance leaves them with an allowance of £9,900, and paying tax at 20% on £1,000, which is £200.
  • If the tax paying partner earns £11,400 per year, before the transfer they pay 20% tax on £400 of taxable income, which is £80.
  • After the transfer, then the taxpayer’s allowance rises to £12,100, taking them out of tax and saving them the £80. In this case, the net gain is replaced by a net loss of £120.

 We can help with Payroll Services

As ever with HMRC there are a few little extras that can add some complexity, as the above shows. As experts in Payroll Services, it is our job to know HMRC’s payroll rules and regulations inside out. So if you need help with payroll, from working out if the Marriage Allowance works for you, up to running your firm’s payroll, allowing you to get on with running your business, we can help.

Contact us or call us on 0121 422 0550.

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