PAYE and the Married Couple’s Allowance
Taxpayers who are part of a couple, one of whom was born before 6 April 1935 are entitled to the married couple’s allowance. You can find out basic information about this allowance in the Personal Allowance section.
In this section we are going to look at some particular aspects of the allowance which might affect you. The married couple’s allowance is very complicated and so we will look at it under a number of headings:
- What you should do if your PAYE code has an adjustment for married couple’s allowance
- What the married couple’s allowance is
- Who gets the married couple’s allowance?
- Additional elections with the married couple’s allowance
What you should do if your PAYE code has an adjustment for married couple’s allowance
The married couples allowance is 2014-15 is £8,165 (£7,915 in 2013-14), but relief is only available at a rate of 10%. Therefore, the maximum reduction to your tax as a result of receiving the allowance is £816.50 (£791.50 in 2013-14).
If you are a basic rate taxpayer, paying tax at 20%, and were simply given an additional allowance of £8,165 on your code, you would receive a reduction of tax equal to £1,633, being double that which you should. Therefore a basic rate taxpayer will normally receive an adjustment to their tax code for married couples adjustment to their tax code of half the allowance, being £4,083. For many pensioners this will be the correct PAYE adjustment and will give the correct tax deduction. If your total pension and earned income is at least £13,540 (£13,450 in 2013-14), then this adjustment to your PAYE code for the married couple’s allowance will be correct. (The £13,450 limit is the age allowance of £10,660 plus the 10% savings band of £2,880).
If you see an addition of £8,165 to your PAYE code for the married couple’s allowance this assumes that you will be entitled to the 10% starting rate for savings (see the starting rate for savings income section). You PAYE code number should be followed by the letter ‘T’. There should also be a note on your PAYE notice of coding saying that you should notify HMRC if your income increases above a certain amount. For 2014-15 this amount is £13,540 (viz. the total of the £10,660 age allowance, for those born before 5 April 1938, added to the 10% savings rate band of £2,880). If your income changes, or if you were not entitled to the 10% starting rate for savings in the first place, you need to notify HMRC or you are likely to pay too little tax.
Higher rate (40%) taxpayers may also receive a tax code adjustment for their married couples allowance. They will only be entitled to the minimum amount of married couple’s allowance of £3,140 (£3,040 in 2013-14) as their total income will be more than the £27,000 threshold for age related allowances. £3,140 of married couple’s allowance would save £314 in tax. So a higher rate (40%) taxpayer would have an addition to their tax code number of 78 (£785 tax free income), as this saves £314 in tax for someone who is paying 40% tax.
What the married couple’s allowance is
The married couple’s allowance is a deduction in your tax bill. This is different from the other personal allowances. The other personal allowances are an amount of tax free income. This difference matters when it comes to PAYE.
Example: the difference between a personal allowance and a deduction from your tax bill
Freda’s total income is £14,500. She is entitled to the personal allowance for those born before 5 April 1938, of £10,660. This means that she pays tax on £14,500 – £10,660 = £3,840. The tax due will be £3,840 at 20% = £768.
Alice and John are a married couple. John was born before 6 April 1935. John is entitled to the married couple’s allowance. John’s income is £14,500 and he, like Freda, is entitled to the personal allowance for those born before 5 April 1938. So he would also have tax due of £768. But he is allowed to deduct £816.50 from his tax bill for 2104-15 (= the married couple’s allowance of £8,615 which is given at 10%). So John’s tax bill of £768 is reduced to nil as it is covered by the Married Couples Allowance ‘deduction’ of £816.50. Note – there is no refund for the £48.50 unused Married Couples Allowances deduction.
The snag is, that it isn’t possible to include a deduction of tax £816.50 in a PAYE code: mathematics won’t allow it. Instead, the tax deduction must first be converted into an amount of tax free income. The problem is, what tax rate should be used to make the conversion? Some pensioners will pay tax at only the 10% starting rate for savings on up to the first £2,880 of their savings income in 2014-15. This is because they have relatively low pensions and some savings income.
Other pensioners will pay tax at 20% on all their income. (Some higher income pensioners will be pay tax at higher rates, but they will only be due a restricted amount of £3,140 in married couple’s allowance).
With a tax rate of 10%, the married couple’s allowance would be equivalent to the £816.50 tax saving ÷ 10% = £8,165 of additional tax free income. (In reality, it is not possible for the married couple’s allowance to cover an additional £8,165 of income at 10%. This is because a maximum of only £2,880 of savings income can be taxed at 10%.)
With a tax rate of 20%, the married couple’s allowance would be equivalent to the £816.50 tax saving ÷ 20% = £4,082.50 of additional tax free income.
So which figure should HMRC put in your tax code – £8,165 or £4,082.50? If they use £4,082.50 you may pay too much tax. If they use £8,165 you may pay too little tax. The solution is to guess which rate of tax will apply to your income – 10% or 20% – use the appropriate figure, and tell you that the result is only valid if your actual income doesn’t exceed the figure they print on the form you are sent (in 2014-15 this figure was £13,540).
Who gets the married couple’s allowance?
The married couples allowance is available to married couples and civil partners where one of them was born before 6 April 1935.
For couples who married before 5 December 2005, the allowance is given to the husband. He must be a married man who is living with his wife. It is possible for a couple to elect for the spouse with the higher income to receive the allowance, rather than it automatically going to the husband, but such an election is unlikely to be beneficial. If the wife has higher income and her income exceeds the income limit, (£26,100 in 2013-14; £27,000 in 2014-2015) the couple would reduce their overall entitlement by making the claim. If the wife’s income is below the limit, the transfer would not change the couple’s overall entitlement.
For couples who marry on or after 5 December 2005, and for civil partners, the allowance is given to the higher income partner. It is necessary to make a claim in order to receive the allowance. This may be made on the annual tax return. If you do not receive a tax return, you should write to your tax office and say that you would like to claim the allowance, stating the grounds for doing so.
Additional elections with the married couple’s allowance
It is possible to change the allocation of the married couple’s allowance by election. For example, either partner may claim half of the allowance, or jointly, partners may decide who is to obtain the minimum allowance. These elections need to be made before the start of the tax year to which they apply. The election can be made on form 18 – http://www.hmrc.gov.uk/forms/18.pdf.
There is another election available – to transfer an unused married couple’s allowance. This may be made within 5 years of 31 January following the end of the relevant tax year.
The married couple’s allowance is complicated and HMRC has published clear advice on its website, please follow the link to the advice http://www.hmrc.gov.uk/incometax/married-allow.htm.
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