Transfer Income to Spouse UK and Save on Taxes with Marriage Allowance

• Siddharth Agarwal
• 16 Sep,2024
• Tax Planning

In the UK, married couples and civil partners have the opportunity to transfer a portion of their personal allowance to their spouse or partner, potentially reducing their overall tax liability. This practice, known as transferring income to a spouse, can be a valuable tax-saving strategy for many households. However, it's essential to understand the eligibility criteria, tax implications and the process of applying for this allowance.

By transferring income to a spouse, you can take advantage of the Marriage Allowance and potentially save hundreds of pounds in taxes each year. In this blog post, we'll explore the ins and outs of transferring income to a spouse, including the benefits, risks and how to apply for the Marriage Allowance. Whether you're a newlywed or have been married for years, understanding this tax-saving opportunity can help you maximise your financial well-being.

Introduction to transferring income to spouse

Transferring income to a spouse is a tax strategy that allows married couples and civil partners in the UK to share their personal tax allowances, potentially lowering their overall tax bill. This approach can be particularly beneficial if one partner earns less than the personal allowance threshold, which is £12,570 for the 2023/24 tax year. By transferring a portion of this allowance, the higher-earning spouse can effectively reduce their taxable income.

The Marriage Allowance enables one partner to transfer up to 10% of their unused personal allowance to the other, resulting in tax savings of up to £1,260. To qualify, one partner must earn below the personal allowance limit, while the other must be a basic rate taxpayer.

This strategy not only helps in minimising tax liabilities but also promotes financial collaboration within a marriage. Understanding how to implement this transfer can lead to significant savings, making it an essential consideration for couples looking to optimise their finances.

What is a marriage allowance?

Marriage Allowance is a tax benefit available to married couples and civil partners in the UK, designed to help reduce their overall tax burden. It allows one partner to transfer a portion of their unused personal tax allowance to the other partner. For the 2023/24 tax year, the personal allowance is set at £12,570. If one partner earns less than this amount, they may not use their full allowance, making it possible to transfer up to £1,260 to the higher-earning spouse.

To qualify for Marriage Allowance, one partner must earn below the personal allowance threshold, while the other must be a basic rate taxpayer, earning between £12,571 and £50,270. This transfer can lead to tax savings of up to £252 per year, making it a valuable option for couples looking to optimise their finances. Claiming the allowance is straightforward and can be done online through the HM Revenue and Customs (HMRC) website, allowing couples to benefit from this financial opportunity easily.

Eligibility criteria for marriage allowance

To qualify for Marriage Allowance, couples must meet specific criteria:

1. Marital status: Both partners must be married or in a civil partnership. Unmarried couples are not eligible.

2. Income limits: One partner must earn less than the personal allowance threshold, which is £12,570 for the 2023/24 tax year. This partner is referred to as the "lower earner."

3. Basic rate taxpayer: The other partner must be a basic rate taxpayer, earning between £12,571 and £50,270. This partner is known as the "higher earner."

4. Transfer amount: The lower earner can transfer up to 10% of their unused personal allowance, which amounts to £1,260 for the current tax year.

5. Application process: Couples must apply for Marriage Allowance through the HM Revenue and Customs (HMRC) website, providing necessary information about their income and tax status.

6. Backdating claims: Couples can backdate their claim for up to four tax years, allowing them to benefit from potential savings.

How to apply for a marriage allowance

Applying for a marriage allowance is a straightforward process. Here’s how to do it:

1. Check eligibility: Ensure that both partners meet the eligibility criteria, including marital status and income limits.

2. Gather necessary information: Collect required details such as National Insurance numbers, income information and personal allowance amounts for both partners.

3. Visit the HMRC website: Go to the official HM Revenue and Customs (HMRC) website to access the Marriage Allowance application page.

4. qq Complete the online form: Fill out the online application form, providing all requested information accurately. This includes confirming which partner will transfer their allowance.

5. Submit the application: Review the information for accuracy and submit the application. You should receive confirmation from HMRC once your application is processed.

6. Monitor your tax code: After approval, check your tax code to ensure the allowance has been applied correctly in your tax calculations.

Tax considerations applicable on transferring income to spouse

When transferring income to a spouse, several tax considerations apply:

• Income tax

When transferring income to a spouse, income tax plays a crucial role in determining the tax implications. The recipient spouse will be taxed on the transferred income based on their income tax rate. If the receiving spouse is a basic rate taxpayer, they will pay 20% on any income that exceeds their personal allowance.

It’s important to note that the transferring spouse does not incur additional tax liability for the amount transferred. Instead, the focus is on how the income affects the recipient’s overall tax situation. Couples should consider their combined income levels when planning transfers, as this can influence their tax brackets and potential savings. Properly managing income transfers can lead to significant tax benefits for both partners.

• Capital gains tax

When transferring assets, such as shares or property, between spouses, Capital Gains Tax (CGT) may come into play. If the transferred asset has increased in value since its acquisition, the transfer may trigger CGT. However, it's important to note that transfers between spouses are typically exempt from CGT, provided that both partners are UK residents and the transfer occurs during the marriage or civil partnership.

If the transferred asset is later sold by the recipient spouse, the original acquisition cost and date will be used to calculate any potential CGT liability. Couples should carefully consider the CGT implications when transferring assets, ensuring they comply with the relevant tax laws and regulations.

• Tax returns

When transferring income to a spouse, it is essential to accurately report this on both partners' tax returns. The spouse receiving the income must include it in their total income for the tax year, which will determine their overall tax liability

The transferring spouse does not need to report the transfer as income, but they should keep records of the transaction for reference. Both partners should ensure that their income details align to avoid discrepancies that could raise questions from HM Revenue and Customs (HMRC).

Additionally, if either spouse is claiming the Marriage Allowance, it is vital to include this information in the tax return to ensure eligibility and proper tax calculations. Accurate reporting helps prevent issues and ensures that both partners benefit from any potential tax savings.

• Tax returns

When transferring income to a spouse, it is essential to accurately report this on both partners' tax returns. The spouse receiving the income must include it in their total income for the tax year, which will determine their overall tax liability

The transferring spouse does not need to report the transfer as income, but they should keep records of the transaction for reference. Both partners should ensure that their income details align to avoid discrepancies that could raise questions from HM Revenue and Customs (HMRC).

Additionally, if either spouse is claiming the Marriage Allowance, it is vital to include this information in the tax return to ensure eligibility and proper tax calculations. Accurate reporting helps prevent issues and ensures that both partners benefit from any potential tax savings.

• Joint income consideration

When transferring income to a spouse, it’s important to consider the couple's joint income. The combined income can affect tax brackets and overall tax liabilities. If one spouse earns significantly more than the other, transferring income can help balance the tax burden and maximise tax efficiency.

For example, if the lower-earning spouse is below the personal allowance threshold, transferring income can allow the higher earner to benefit from a lower tax rate. This strategy can lead to potential savings, especially if the higher earner is close to moving into a higher tax bracket.

Additionally, couples should assess how their combined income impacts eligibility for various tax reliefs and benefits. Understanding the implications of joint income can help couples make informed decisions about income transfers and overall financial planning.

• Inheritance tax

When transferring income or assets to a spouse, it is essential to consider the implications of Inheritance Tax (IHT). In the UK, transfers between spouses are generally exempt from IHT, allowing couples to transfer assets without incurring tax liabilities during their lifetime. This exemption applies to both income and capital assets, making it a beneficial strategy for estate planning.

However, if the spouse receiving the assets later passes away, the value of those assets may be included in their estate for IHT calculations. The current IHT threshold is £325,000, meaning that if the total estate value exceeds this amount, tax may be due at a rate of 40%. Couples should be aware of these rules and consider seeking professional advice to ensure their estate planning aligns with their financial goals and minimizes potential tax liabilities in the future.

Benefits of transferring personal allowance

Transferring personal allowance between spouses offers several advantages:

1. Tax savings: By transferring unused personal allowance, couples can reduce the higher earner's taxable income, leading to potential tax savings of up to £252 per year.

2. Maximised allowance use: Many couples do not fully utilise their personal allowances. Transferring the unused portion ensures that both partners benefit from their allowances.

3. Lower tax bracket: If the lower-earning spouse has a personal allowance that goes unused, transferring it can help the higher earner remain within the basic tax rate band, avoiding higher tax rates.

4. Financial collaboration: This strategy encourages couples to work together on their finances, fostering a sense of teamwork in managing household income and expenses.

5. Flexibility: Couples can adjust the transfer each tax year based on changes in income, allowing them to optimise their tax situation as needed.

6. Easy application process: Claiming the Marriage Allowance is straightforward and can be done online, making it accessible for most couples.

Transferring income to a spouse can provide significant tax benefits, particularly through the Marriage Allowance. By understanding the eligibility criteria and application process, couples can effectively reduce their overall tax liability.

This strategy not only maximises the use of personal allowances but also encourages financial collaboration between partners. Whether you are newly married or have been together for years, taking advantage of income transfers can lead to substantial savings.

Regularly reviewing your financial situation ensures that both partners benefit from available tax reliefs and maintain an efficient tax strategy throughout their marriage.

If you are planning to transfer income to your spouse and need any assistance related to its tax implications, we at dns tax are here to help you withinheritance tax planning . Our expert team of tax advisors specialises in handling overseas property tax matters, ensuring you comply with UK tax laws while maximising your tax efficiency.

Whether you need help calculating your taxes or want to explore tax-saving strategies, we're here to guide you every step of the way.

Contact us today at 0333 2422 572, email dnstax@dnsaccountants.co.uk, or book a free consultation. Our friendly experts will gladly discuss your specific requirements and provide services to meet your overseas property tax needs.

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.