Hundreds of thousands of women pensioners who have shared part of their income tax allowance with their husband could face unexpected tax bills as a result of the freezing of the income tax allowance, according to LCP partner Steve Webb.

 The marriage allowance applies in cases where:

• One member of the married couple (or civil partner) pays tax at the basic rate and
• The other member is a non-taxpayer

The latest government figures suggest that around 2.1m couples benefited from the Marriage 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.

In these cases, the non-taxpayer can sign over 10% of her personal allowance (currently 10% of £12,570, or £1,260, rounded up) to her husband. Provided that the wife is more than 10% under the tax threshold, she remains a non-taxpayer. The husband benefits, usually by saving 20% tax on £1,260, a saving of £252 per year. Once the wife has opted into this system, the transfer carries on every year until it is revoked.

Until now, many wives could freely hand over 10% of their allowance at no cost to themselves because their taxable income was below 90% of the full allowance (90% of £12,570 or £11,310).

However, big cash increases in the value of the state pension, coupled with a freezing of the tax threshold, means that more of these women will now go over the 90% threshold. For example, if the new state pension 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 then have a small tax liability, as she only has £11,310 left of her allowance to set against an income of £11,500. 

This tax would normally be collected through the ‘Simple Assessment’ process via a tax demand in the post after the end of the financial year. 

Such couples will then have two options:

• To carry on with the marriage allowance, leaving the wife getting a small tax bill every year or
• To cancel the marriage allowance, increasing the husband’s tax bill and potentially leaving the couple worse off overall

This issue will also affect non-pensioner couples, but in many such working-age couples, there will be a stay-at-home partner with little or no taxable income and no need to worry about this issue. But for pensioners, even the lower income partner may be relatively close to the tax threshold because of the existence of the state pension.

 Commenting, 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.”