Hundreds of thousands of married women relying on marriage tax allowances may face an unexpected tax bill next year. Approximately 750,000 pension-age couples utilize the marriage allowance to reduce tax liabilities by sharing part of their income tax allowance. However, frozen tax thresholds and increasing state pensions could eliminate the full benefit of this tax break, leading to surprise bills from HM Revenue & Customs in April. Former pensions minister Steve Webb, now with Lane Clark & Peacock (LCP), warns of potential “mayhem” for those dependent on the marriage allowance.
The marriage allowance allows couples, where one partner earns below the personal income tax allowance of £12,570, to share their allowances. If one spouse earns at least 10% less than the personal allowance (£11,310) and the other is a basic-rate taxpayer, the lower earner can transfer 10% of their unused tax allowances at no extra cost. This strategy shields a significant portion of the couple’s income from taxes. Until now, those receiving the full state pension, currently £10,600 a year, could use the marriage allowance, provided they had no other earnings.
With the state pension potentially increasing by 8.5% next year under the “triple lock” mechanism, pensioners on the full new state pension may receive a £902.20 boost, reaching an annual income of £11,502.40. However, to fully benefit from the allowance, earnings must remain below £11,310. The combination of frozen thresholds and rising state pensions poses a financial challenge for couples, highlighting potential complications in the coming tax year.