Maximising Couple's Tax Savings UK

Navigating the complexities of the UK tax system can be a daunting task for individuals, let alone for couples. However, for married couples and those in civil partnerships, there are specific allowances and strategies designed to help you optimise your tax position and potentially keep more of your hard-earned money. Understanding these provisions is key to ensuring you're not paying more tax than you need to. This comprehensive guide will delve into two primary mechanisms: the Marriage Allowance and the rules surrounding income shifting for jointly owned assets, providing clarity and practical examples to illuminate how they work.

Understanding the Marriage Allowance: A Helping Hand for Couples

The Marriage Allowance is a valuable UK tax relief that allows one spouse or civil partner to transfer a portion of their unused Personal Allowance to their partner. This can lead to a significant reduction in the couple's overall tax bill. It's a key benefit designed to support families where one partner has a lower income.

How Marriage Allowance Works

At its core, the Marriage Allowance enables you to transfer £1,260 of your Personal Allowance to your husband, wife, or civil partner. Your Personal Allowance is the amount of income you can earn each tax year (6 April to 5 April the next year) before you start paying Income Tax. By transferring this allowance, your partner's tax bill can be reduced by up to £252 in the tax year.

For a couple to benefit, the lower earner must typically have an income below their Personal Allowance, which is currently £12,570. This ensures that they have 'unused' allowance to transfer. While transferring some of your Personal Allowance might mean you pay a little more tax yourself, the overall saving as a couple often makes it a worthwhile strategy.

Example of Marriage Allowance in Action

Let's consider a practical scenario to illustrate the benefits:

• Your income is £11,500, which is below the Personal Allowance of £12,570, meaning you currently pay no tax.
• Your partner's income is £20,000. Their Personal Allowance is also £12,570, so they pay tax on £7,430 (their 'taxable income'). As a couple, you are paying Income Tax on £7,430.

When you claim Marriage Allowance, you transfer £1,260 of your Personal Allowance to your partner. This changes the tax landscape:

• Your Personal Allowance becomes £11,310 (£12,570 - £1,260). Since your income is £11,500, you will now pay tax on £190 (£11,500 - £11,310).
• Your partner receives a reduction of £1,260 on their taxable income. Instead of paying tax on £7,430, they will now only pay tax on £6,170 (£7,430 - £1,260).

The net result for the couple is a significant saving. Instead of paying Income Tax on £7,430, you are now only paying tax on a combined £6,360 (£190 from you + £6,170 from your partner). This shift saves you a total of £214 in tax.

Who Can Apply for Marriage Allowance?

To be eligible for Marriage Allowance, all of the following conditions must typically apply:

• You must be married or in a civil partnership.
• You (as the lower earner) must not pay Income Tax, or your income must be below your Personal Allowance (usually £12,570).
• Your partner must pay Income Tax at the basic rate. This generally means their income falls between £12,571 and £50,270 before they receive the Marriage Allowance.

It's important to note that you cannot claim Marriage Allowance if you are living together but are not married or in a civil partnership. Additionally, specific rules apply if you're in Scotland; your partner must pay the starter, basic, or intermediate rate, meaning their income is usually between £12,571 and £43,662.

The allowance remains accessible even if you or your partner are currently receiving a pension or live abroad, provided you still receive a Personal Allowance.

Marriage Allowance vs. Married Couple's Allowance

It's crucial not to confuse Marriage Allowance with Married Couple's Allowance. If you or your partner were born before 6 April 1935, you might benefit more from applying for Married Couple's Allowance instead. You cannot claim both allowances simultaneously, so it's worth checking which one provides the greater benefit for your specific circumstances.

Backdating and Stopping Your Claim

A significant advantage of the Marriage Allowance is the ability to backdate your claim. You can typically backdate your claim to 6 April 2021 (the 2021 to 2022 tax year) for any years you were eligible. Your partner's tax bill will be reduced based on the Personal Allowance rate for the years you're backdating. Even if your partner has sadly passed away since 5 April 2021, you might still be able to claim by contacting the Income Tax helpline.

Once claimed, your Personal Allowance will automatically transfer to your partner every year. However, you can cancel the Marriage Allowance at any time, for instance, if your income changes significantly or if your relationship ends.

Shifting Income to Your Spouse: Optimising Jointly Owned Assets

Beyond the Marriage Allowance, married couples and civil partners have another powerful tool to optimise their tax liability: strategically shifting income from jointly owned assets. While historical, somewhat sexist, tax rules that treated a wife's income as her husband's were scrapped in 1990, certain aspects remain that allow couples to alter the share of income on which they each pay tax.

HMRC's View and the 50:50 Default

HMRC has specific anti-avoidance rules to prevent income shifting purely for tax evasion. However, a legitimate relief from the pre-1990 system still exists, enabling married couples to shift income and achieve a reduction in their overall tax liability.

By default, if you and your spouse jointly own an asset (such as a rental property or investments), HMRC takes the view that income derived from it is taxable on a 50:50 basis. This applies regardless of the actual proportions in which you might legally own the asset. For example, if one spouse owns 80% of a rental property and the other owns 20%, the taxman will still require each of you to declare 50% of the income and pay tax on it.

Making a Joint Election with Form 17

You can circumvent this default 50:50 rule by submitting an election to HMRC using Form 17. This form allows you to elect to be taxed on your actual share of the income (i.e., in relation to your true beneficial interest in the asset), rather than the standard 50:50 split. This can be particularly advantageous if one spouse is a higher-rate taxpayer and the other is a basic-rate or non-taxpayer.

Conditions for Making a Form 17 Election

There are several strict conditions that must be met before you can make this election:

• Unequal Ownership: You must genuinely own the property in unequal shares. You will also need to provide concrete evidence to support this, such as a formal declaration of trust or a deed that clearly outlines the beneficial interests.
• Proportional Entitlement: You must be entitled to the income arising from the asset in proportion to those unequal shares.
• Intent to be Taxed Unequally: You must explicitly desire to be taxed on the basis of your unequal shares.

When Form 17 Does Not Apply

The Form 17 election does not apply to all types of income or circumstances:

• Partnership Income: Any profit split from a partnership should be detailed within the partnership agreement itself.
• Furnished Holiday Lettings: If these are let on a commercial basis (i.e., not at discounted rates to friends and family), the election typically does not apply.
• Income from Shares in a Close Company: This usually refers to a company owned and controlled by you. Specific rules apply here.
• Income Treated as Belonging to Someone Else: If the income is treated as belonging to another person for tax purposes, even if the property is jointly held, Form 17 won't apply.
• Property Held as Joint Tenants: If the property is held as 'joint tenants' (where both own 100% and it automatically passes to the survivor), rather than 'tenants in common' (where specific shares can be held), Form 17 is not applicable.
• Property Not Held in Unequal Shares: Naturally, if the property is genuinely owned 50:50, there's no need for a Form 17 election as the default rule aligns with actual ownership.

It's important to be aware that once you submit a Form 17 election to HMRC to be taxed on your actual interest (e.g., 80%/20%), this cannot be easily changed later. This decision has long-term implications for how that specific asset's income is taxed.

Examples of Shifting Income with Form 17

Let's look at how strategic income shifting can benefit couples:

Example 1: Lois and Clark – Rental Income

• Lois and Clark jointly own a gym, with beneficial ownership split 20% for Lois and 80% for Clark.
• They receive net rental income of £20,000 per year from letting it.
• Initially, if both pay tax at the basic rate, the 50:50 default (£10,000 each) or the 80:20 split (£4,000 for Lois, £16,000 for Clark) makes no difference to their combined tax bill.

However, the situation changes:

• Lois gets a promotion and starts paying tax at the 40% higher rate.
• Clark gives up his job for voluntary work and has no other income apart from this rent.

If they make an election on Form 17:

• £16,000 (80% of £20,000) is taxed on Clark. This income is partially covered by Clark's Personal Allowance, and the remainder is taxed at the basic rate, leading to a much lower tax liability for Clark.
• Lois is taxed on £4,000 (20% of £20,000).

Without the election, Lois would pay tax at 40% on £10,000 (her 50% share), whereas with the election, she only pays 40% on £4,000, resulting in significant savings for the couple.

Example 2: Linda and Paul – Dividend Income

• In the 2016/17 tax year, Linda's quoted shareholdings pay her dividends of £20,000. Her other income as a photographer is £32,000.
• Higher rate tax on dividends starts at income over £43,000. This means £9,000 of Linda's dividends (£20,000 + £32,000 - £43,000) would be taxed at the higher dividend rate of 32.5%.
• Her husband, Paul, has an income of £28,000.

Linda decides to make each shareholding jointly owned by transferring a 5% share to Paul. They decide not to make a Form 17 election, allowing the 50:50 rule to apply.

• They are now taxed on 50% of the dividends each – £10,000 for Linda and £10,000 for Paul.
• This means Linda's total income is now £32,000 (salary) + £10,000 (dividends) = £42,000. She is no longer liable to higher rate tax on her dividends.
• Paul's total income is £28,000 (salary) + £10,000 (dividends) = £38,000. He is also not liable to higher rate tax on his dividends.

This simple act of making the shareholding jointly owned, and accepting the 50:50 split, ensures neither pays higher rate tax on the dividends, leading to a substantial overall tax saving for the couple.

For shares in your own private company, another method of income shifting might involve issuing shares to your spouse, particularly if they genuinely support the business.

Frequently Asked Questions About Couple's Tax

What is the basic premise of Marriage Allowance?

The Marriage Allowance allows a spouse or civil partner who earns below their Personal Allowance to transfer £1,260 of their unused allowance to their partner. This reduces the partner's Income Tax bill by up to £252 in a tax year, benefiting the couple as a whole.

Can common-law partners claim Marriage Allowance?

No, Marriage Allowance is strictly for married couples or those in a civil partnership. Living together without formalising the relationship does not qualify you for this allowance.

How far back can I claim Marriage Allowance?

You can backdate your Marriage Allowance claim for up to four previous tax years, provided you were eligible during those periods. This means you could receive a rebate for prior years' overpaid tax.

What is the purpose of HMRC Form 17?

HMRC Form 17 is used by married couples or civil partners who jointly own assets (like property) in unequal shares, and who wish to be taxed on the income from these assets according to their actual beneficial ownership proportions, rather than the default 50:50 split applied by HMRC.

Are there any risks to shifting income?

While legitimate income shifting using allowances like Marriage Allowance or Form 17 is permissible, HMRC has anti-avoidance rules. It's crucial that any income shifting reflects genuine beneficial ownership and is not solely for tax evasion. Always ensure you meet all conditions for any allowance or election you claim.

What if my income changes after applying for Marriage Allowance?

If your income, or your partner's income, changes such that you no longer meet the eligibility criteria (e.g., the lower earner's income rises above their Personal Allowance, or the higher earner's income goes above the basic rate threshold), you should cancel the Marriage Allowance. It transfers automatically each year until cancelled.

Can I claim both Marriage Allowance and Married Couple's Allowance?

No, you cannot claim both Marriage Allowance and Married Couple's Allowance at the same time. If you or your partner were born before 6 April 1935, you should assess which allowance provides the greater financial benefit for your circumstances.

Conclusion: Taking Control of Your Couple's Tax

Understanding and utilising allowances like the Marriage Allowance and the rules around income shifting for jointly owned assets can significantly impact your household finances. These provisions are not merely bureaucratic hurdles but opportunities to legally reduce your tax burden. Whether it's transferring a portion of your Personal Allowance or strategically managing income from shared investments, proactive planning can lead to tangible savings.

It's always advisable to regularly review your financial situation and ensure you are claiming all the allowances you are entitled to. While this guide provides a comprehensive overview, individual circumstances can vary, and for complex situations or if you are unsure of your taxable income, consulting directly with HMRC or a qualified tax adviser can provide tailored advice and ensure you remain compliant while maximising your tax efficiency.

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