State pension loophole means YOU could end up paying tax next year – how to avoid it
A STATE pension loophole means you could end up unexpectedly paying tax next year.
The issue affects those who use the marriage allowance, which lets you share some of your tax-free allowance with your spouse.
It's a legal way of reducing the income tax you pay and can save you hundreds of pounds a year.
As it stands, you can transfer 10% of your £12,570 personal allowance, which is around £1,260, to a basic-rate taxpayer partner.
This can reduce their tax bill by around £252 with those eligible able to backdate claims by four years, totalling £1,258.
However, due to the freeze in income tax thresholds and the rise in state pension under the triple lock, it can see lower earners handing over 10% of their personal allowance and then being taxed themselves.
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For example, the full new state pension is worth £221.20 a week or £11,502 a year.
But someone on this amount and transferring 10% of their personal allowance would end up with £11,310 left, and paying tax on £192.
With the state pension rising by 4.1% from next April, it will mean even more pensioners using their marriage allowance are stung.
This is because someone on a full new state pension will get £11,973 a year, and would end up paying income tax on £663 if they transferred 10% of their personal allowance.
Steve Webb, former pensions minister and partner at pension consultants LCP, said: "The ongoing freezing of the personal tax allowance has created all sorts of unintended consequences.
"We are now in a situation where hundreds of thousands of married women need to choose between starting to pay tax on their pension for the first time, or revoking their marriage allowance and putting up their husband’s tax bill by hundreds of pounds.
"The whole situation is a complex nonsense."
Steve said you have two options if you are on a full new state pension and are being taxed on your marriage allowance.
You can carry on receiving it, leaving one partner to get a small tax bill which will need to be paid by self-assessment if you have no other income.
The tax is usually collected by HMRC using a "Simple Assessment" process at the end of the financial year.
Or, you could stop the marriage allowance completely, however this could leave you worse off overall.
Who is eligible for marriage tax allowance?
One of you needs to be earning little enough to not be paying a personal allowance, while the other has to be on the "basic rate" of income tax.
The basic rate applies to anyone earning £12,571 to £50,270 a year and is worth 20%.
Both people in the couple have to have been born on or after April 6, 1935, as well. Plus, you must be married or in a civil partnership.
How to apply for marriage allowance
The lower fee payer or non-taxpayer has to apply.
The easiest way is to fill out a form on the Government's website.
You’ll need both your National Insurance numbers and a form of ID for the non-taxpayer.
Alternatively, you can apply through self-assessment or by writing to HMRC.
The requirements you must meet include being a married couple or civil partnership - and being born on or after April 6, 1935.
Whichever way you do apply, any backdated money owed to you will be calculated automatically and sent to you as a cheque.
If you need any assistance applying, you can call the HMRC helpline on 03000 200 3300.
The relief for the current financial year (2024/25) is £252 while it's the same for 2023/24 and 2022/23.
For 2021/22 and 2020/21 the maximum backdated amount you can get is £252 and £250 respectively.
As an example, if your income is £11,500 your personal allowance is £12,570 so you don't pay any tax.
If your partner's income is £20,000 they pay tax on £7,430 which is £20,000 minus the personal allowance.
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But you could transfer your personal allowance to your partner meaning they would only pay tax on £6,170 and you would effectively be earning £12,760 and have to pay income tax on £190.
It means as a couple you would pay less combined income tax and would save £214 overall.
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