The tax system in the UK usually looks at the legal position rather than the relationship status of couples. There are exceptions to this, for example those paying the high income child benefit charge.
Married Couple’s Allowance (MCA)
The married couple’s allowance is available to married couples where at least one spouse was born before 6 April 1935 and who are living together during the tax year. It is possible that when an elderly taxpayer moves into a care home the couple may become separated for tax purposes and the married couple’s allowance may no longer be available. Entitlement to the allowance was extended to civil partners if at least one of them was born before 6 April 1935. The reference to the year 1935 does not change from one year to the next. For marriages which took place prior to 5 December 2005, it is the husband’s income which is used to work out married couple’s allowance. For marriages and civil partnerships formed after that date, it is the income of the highest earner which is used.
The married couple’s allowance works by reducing a claimant’s income tax liability by 10% of the allowance. This tax reduction cannot create a tax overpayment so it is restricted to the amount of the claimant’s tax liability.
Marriage Allowance (MA)
An election may be possible for the transferable tax allowance for married couples and civil partners which is known as the ‘marriage allowance’. The marriage allowance is only available to those couples where there is no higher rate tax liability for either party. The partner with the lower taxable income gives up 10% of their personal allowance (£1,260 for 2022/23). The recipient partner receives a tax reducer (£252 for 2022/23) which can be set against their basic rate tax liability – so reducing the amount of tax they pay.
There is a misconception that the recipient partner has their own personal allowance increased as a result of the claim. This is not correct. The allowance is given by way of a tax reducer.
Blind Person’s Allowance (BPA)
The blind person’s allowance (BPA) is available to individuals registered as severely sight-impaired with a local authority in England and Wales. The name can be misleading as you do not have to be completely without sight to qualify. For 2021/22, the blind person’s allowance is £2,600 which is given in addition to the standard personal allowance which is not reduced where the individual’s adjusted net income exceeds £100,000.
If a person is entitled to the blind person’s allowance but their income is too low to make full use of it, marrying or entering into a civil partnership will enable them to elect to transfer the surplus allowance to their partner.
Joint income: let property
Couples who are neither married nor in a civil partnership who but own property jointly may agree the split of property income between them, even if this is different from the underlying beneficial ownership. They are then taxed on their agreed share of income. No formal election is required, although we would advise recording the agreement in writing.
Where joint owners of a let property are married or civil partners, the share of any profit or loss is to be treated as arising to each owner equally, irrespective of their underlying beneficial entitlement. The parties may both elect (within 60 days) on form 17 to be taxed on their respective beneficial interests, if these are unequal. Therefore, couples who are not in a civil partnership or marriage have more flexibility when it comes to splitting rental income from jointly held property. This could result in an overall tax saving if, by agreeing a different split of income to actual share of ownership, better use can be made of tax allowances and lower rate tax bands.
Joint income: savings interest
Where the joint account holders are not in a civil partnership or marriage, each partner is taxed on the share of interest to which they are entitled. In most cases, this will be 50:50, even if contributions to the account are unequal. Interest paid on joint bank accounts held by those in a marriage or civil partnership will, as in the case for jointly held let property, be taxed in equal shares unless an election is made to be taxed in accordance with beneficial interests if these are unequal. Situations where beneficial ownership would not be 50:50 would be quite unusual.
Tax credits and universal credit
For benefit claims couples living together as though they were husband and wife or civil partners will need to make a joint claim.
A change in relationship status can affect benefits claims, as it can alter whether they should be made on a single or joint basis. Marriage or entering into a civil partnership will affect existing tax credits claimants who have previously been making single claims, if HMRC would not already have been treating them as a ‘couple’ and making a joint claim.
Universal credit is replacing tax credits as the main working-age benefit. HMRC will no longer accept any brand new tax credit claims. This means that where a change in circumstances triggers the need to make a joint claim, that claim will have to be for universal credit, and existing single tax credits claims will end.