The mechanics of the marriage allowance

The Tax Faculty answers some questions raised by members 

Members have raised a number of queries with the Tax Faculty about the details of the marriage allowance, particularly where one or both members of the couple are in self assessment.  

Here we give some details about how the allowance works, which we hope will assist members and answer the questions. If you have come across any other specific issues, please post details in the comments section below.  

The marriage allowance
A married couple or civil partners can apply to transfer 10% of the income tax personal allowance from one to the other. Although called the marriage ‘allowance’, it is a transfer rather than an additional allowance. This measure was introduced on 6 April 2015. 

To qualify for the transferable marriage allowance neither of the partners can be higher rate taxpayers and they must not be claiming the married couple’s allowance. The couple must be married or civil partners for at least part of the tax year concerned and at the date of the application. 

The maximum tax saving in 2016/17 is £220 (10% of the £11,000 personal allowance at 20%). 

It can quickly become uneconomic for advisers to assist with marriage allowance application issues and the small amount of tax involved is probably also why so few of the estimated four million couples entitled to apply have done so.  

Income conditions – HMRC guidance is wrong
The income-related conditions as stated on GOV.UK and in HMRC manuals are incorrect. The correct position is:  

  • The main income condition which applies to the transferor is that the individual is not, for the tax year, liable to tax at a rate other than the basic rate, the Scottish basic rate, the dividend ordinary rate or the starting rate for savings (s55C(c), Income Tax Act (ITA) 2007). Finance Act 2016 will add the savings nil rate band to this section.

  • The main income condition that applies to the recipient is that the individual is not, for the tax year, liable to tax at a rate other than the basic rate, the Scottish basic rate, the dividend ordinary rate or the starting rate for savings (s55B(b), ITA 2007). Finance Act 2016 will add the savings nil rate band to this section.

Despite what the legislation says, HMRC has set out on GOV.UK and in its manuals an additional test for the transferor: that annual income is £11,000 or less, plus up to £5,000 of tax-free savings interest. 

In most cases the fact that HMRC is applying the additional test will not disadvantage the couple concerned, but given the complexity of the new tax treatment of saving and dividend income, this may not always be the case. We have raised this issue with HMRC.

Allowance given as a credit/tax reducer
An application for marriage allowance results in a reduced personal allowance for the transferor. However, the recipient receives a tax reduction rather than an increased personal allowance (stage 6 rather than stage 3 of the tax calculation as set out in s23, ITA 2007). The transfer is shown in tax codes as an adjustment to the personal allowance but as a tax reducer on the SA302 or P800 tax calculation. 

Applying for the allowance
The application for the transfer is made by the person who wishes to transfer part of their allowance – it is fundamental that the recipient does not make a claim but instead receives the credit following an application by the transferor. 

  • If the level of a couple’s income is predictable, it may be best for the transferor to make the application during the tax year on www.gov.uk/marriage-allowance/how-to-apply as the application then applies until it is withdrawn.

  • Applications made after the end of the tax year, including on a self assessment return, are valid only for the year of the application – but this will generally be the preferred approach where it is unclear whether there will be any entitlement.

  • Only the transferor makes entries on their tax return; there is no requirement (and no facility) for the recipient to make any entries on their return. Some commercial software packages may show the impact of the transfer but the credit is given by HMRC after the returns are processed. The credit will not be reflected in the payments on account for the following tax year.

  • HMRC advises that when a transferor files a tax return including an application to transfer allowances, that will create a credit which is held on the recipient’s self assessment account and is applied automatically when the recipient files their tax return (or applied to the recipient’s P800 PAYE tax calculation if they are not in self assessment). If the recipient files their tax return first, they should receive a revised SA302 calculation automatically when the transferor’s tax return is filed.

  • We understand there was an issue with the process described above for a short period following 6 April but that this has now been resolved.

Anonymous
  • Thanks for this article

    I was just told by PTP Software that the only way to claim this allowance was digitally (which I thought odd) but you make it clear that this is not the case so this has saved me time and stress.

    Tim

  • Dear All, It seems more than a little strange to have a Self Assessment Return filed by the beneficiary (of an election to transfer TTA) where he or she is supposed to "know" that his or her liability is actually less than that shown on the tax return. It will not inspire confidence. But have no fear, because the Tax Calculation WorkSheet (SA110 Notes) does have a box for the taxpayer to adjust the liability for the TTA (A314). Of course they cannot include this in the tax return... So, all is well. Except for the fact that interim payments are also affected, as LT points out above. Interestingly, the TCWS resolutely ignores the effect of the TTA on the 2016/17 Payments on Account. So at least the SA Return will be consistently "wrong". This in turn means that, if LT's recounting is correct, the tax return will have too high a figure for both the liability for the year, and the interim payment for 2016/17. This may prove difficult to sell to clients. Should the benefit of the TTA factor in interim payments? It is difficult to see why not: the new legislation for the TTA at ITA 07 s55A (2) simply states that "A tax reduction under this Chapter is given effect at Step 6 of the calculation in s 23". There are several other reductions that apply at Step 6, and I don't see HMRC having any problems with their being included for the purposes of TMA 70 s 59A (Payments on Account). So the TCWS refuses to give the credit towards the interim payment, to which the taxpayer is entitled (as well as to the return year liability in the first place) but has anyone else noticed that the TCWS is insisting on giving credit for Class II NICs in the interim payments? No doubt readers will be aware that NICA 2015 Sch 1 para 3 introduces that TMA 70 s 59A will not apply to Class II NICs. Yet the SA110 Notes appear to have missed this point, and happily instruct the taxpayer to add the liability to interim payments. Hardly inspiring. Regards all, TW Ed

  • Although you state that the credit will not be reflected in the payments on account for the next year, we have already received a revised tax calculation confirming that a clients payments on account are reduced. Please mention that application can be undertaken for clients on the phone if, as agents we act for both parties. You should not need the date of marriage, but it is helpful. Our clients are all showing appreciation and it helps pay our fees!