The marriage allowance and why becoming a higher rate taxpayer could become ‘very expensive’

When I was one of those people who thought Labour might win last year’s general election I suggested that the new income tax ”marriage allowance” might be short-lived. “We think it is a dud of a policy,” Labour’s shadow Treasury minister had said.

The government said more than four million married couples and 15,000 civil partnerships would be eligible for the allowance, introduced from April 2015. The maximum benefit is just over £4 a week.

But in a parliamentary written answer on 2 February the government said only 332,301 couples had successfully claimed the allowance by 28 January, prompting another shadow minister to call the policy a “complete and utter flop”.

HMRC calls it the “marriage allowance” but the legislation[1] calls it (more accurately, but it’s a bit of a mouthful) a “transferable tax allowance for married couples and civil partners”. It is not available to higher rate taxpayers.

For example, H works full-time and is a basic rate taxpayer, and W works part-time and has an income below the personal allowance. H is entitled to a tax reduction of £212 (20% of £1,060) for 2015/16 if W elects “for a reduced personal allowance”.

HMRC points out that W can transfer “no more and no less than £1,060” of her personal allowance.

What happens if H gets a pay rise and becomes a higher rate taxpayer? As Paul Johnson of the IFS told a Lords committee on the draft Finance Bill last month, he would lose the benefit of the allowance immediately, so “you are facing several hundred per cent tax at the point at which you move from the basic to higher rate”.

An IFS briefing note had said in the run-up to the election:

“Indeed, some can be worse off after a pay rise, or better off after a pay cut, because the transferred allowance is withdrawn in ‘cliff-edge’ fashion – that is, income tax liability jumps by more than £200 per year when taxable income crosses the higher-rate threshold. The removal of this cliff edge would be a welcome side effect of abolishing the transferable personal allowance.”

Johnson was giving evidence to peers discussing the new personal savings allowance and the new regime for taxation of dividends. These changes, to be introduced in Finance Bill 2016, are raising some serious concerns.

We will have “all sorts of additional marginal rates layered on top of each other,” he said, adding that “becoming a higher rate taxpayer is going to become a very expensive part of your life”.

[1] Income Tax Act 2007 sections 55A-55E

Why do we have tax relief for losses?

Our tax code provides relief for losses so that the profits earned over the lifetime of a business are taxed once and only once. For example, a business has made trading profits of £550,000 and losses of £200,000 over five years, and has no other income. Its net profits are £350,000 and tax is paid on that amount, as shown below:


The company would be able to claim to have the loss in year 3 set first against the profit of year 2, leaving a smaller loss to carry forward, but the table shows how the carry forward of trade losses works. There are conditions, and special rules for banks and groups of companies.

Bringing forward allowable trading losses is not tax avoidance, and it is worth noting that a similar relief (with some important differences) is available to the self-employed. It is not just for companies.

UK tax policy and the corporate tax base: a public consultation

I think we can probably expect the Treasury committee’s inquiry into UK tax policy and the corporate tax base to be more informative and fruitful than the public accounts committee’s inquiry into “corporate tax deals”.

The Treasury committee has invited submissions by 31 March. In the meantime here is the transcript of the Treasury committee’s first evidence session, held on 2 February.

See also: Taxing multinationals: BEPS outputs and the ‘digital economy’

Childcare support – an update

This note on the importance of clear guidance on the interaction between tax-free childcare and other means of support is extracted from my recent update for Tax Adviser:

“The new childcare support landscape will be complex and we have stressed the importance of providing users with guidance that not only explains the rules of each scheme but also gives enough information for users to choose between schemes. Research published by HMRC has found ‘very strong support’ for an online calculator. However, parents – particularly those in two-parent households – often assumed they would be ineligible for [tax-free childcare]. This suggests that HMRC faces a challenge in raising awareness among parents.”

The Low Incomes Tax Reform Group provides regular technical updates for the magazine. Read more on the Tax Adviser website.

Taxing multinationals: BEPS outputs and the ‘digital economy’

“We aim to solve this problem in the next two years,” OECD tax director Pascal Saint-Amans said in 2013, a month before presenting to G20 ministers an action plan to tackle  “base erosion and profit shifting” (BEPS).

Very little has been said in mainstream media about the impact of the BEPS project’s “final reports”, published last October. The rules governing taxation of multinationals will change, but they cannot be changed in a hurry, nor retrospectively. Campaigners have said for a long time that only fundamental reform will do.

Sol Picciotto noted last week that the OECD’s task force on the digital economy had “recognised that digitalisation means that [multinationals] have come ‘closer to the economist’s conception of a single firm operating in a co-ordinated fashion to maximise opportunities in a global economy’”. He added:

“[The task force] also accepted that this entails a ‘substantial rewrite of the rules for attribution of profits’. The report canvassed several possibilities … However, it could not agree even to recommend any of these, and left it to states to decide. Meantime, the task force will continue, aiming to produce a report in 2020. Plainly, we cannot wait that long.”

The OECD report Addressing the tax challenges of the digital economy said that work will continue following “completion of the other follow-up work on the BEPS project”, and the future work will be based on a mandate to be “developed during 2016”. It added that “a report reflecting the outcome of the continued work in relation to the digital economy should be produced by 2020”.

So the UK’s Treasury committee inquiry into tax policy and the “shrinking” corporate tax base is welcome. We can expect some more clarity than we have seen in some of the recent press reports, and some useful analysis of the possibilities for reform. The problem is even more urgent than it was in 2013, but the solution has to be the right one.