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“Indeed, some can be worse off after a pay rise, or better off after a pay cut, because the transferred allowance is withdrawn in ‘cliff-edge’ fashion – that is, income tax liability jumps by more than £200 per year when taxable income crosses the higher-rate threshold.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