Maximising tax free income

okydoky

We will shortly be in a position where our only income will be drawdown from our SIPP’s - mine is already in drawdown within the personal allowance and wife will shortly take UFPLS within PA.

However by using Marriage Allowance and transferring 10% to her, I can draw £11250 but she could take an extra £1250 without paying tax? Or seeing that she would actually need to be a tax payer to benefit from this she takes a smidgen more than this and pays a very small amount of tax but benefits by being able to take the extra income?

Example :-

We pay no tax, my drawdown is pegged at £12500 and she takes £16600 under UFPLS with first 25% tax free so both within PA.

Alternatively she pays very small amount of tax by taking £18400 under UFPLS and I transfer 10% marriage allowance meaning that jointly we have about £400 pa more in tax free income.

Does this work??

Dazed_and_confused

Being the recipient of Marriage Allowance does not give your wife a larger Personal Allowance. It entitles her to a deduction from her tax liability.

So you can have £11,250 pension and pay no tax on it. You could also then have £6,000 savings interest and pay no tax on it courtesy of the savings starter and nil rates of tax.

If your wife had taxable pension income of £13,800 then she would be liable to tax on £1,300 (£13,800 less £12,500 Personal Allowance) and this would be taxed at either 19% or 20% depending on where she is resident for tax purposes. If we assume it's 20% then that is a liability of £260 which is then reduced by £250 by the Marriage Allowance tax credit she is entitled to. End tax liability is £10.

But your wife can then only have £4,700 savings income taxed at the savings starter rate (£3,700) and savings nil rate (£1,000).

This all assumes neither of you make any charitable donations under the gift aid scheme and have no other earned income (wages, business profits, rental income etc).

okydoky

Ok thanks very much for that.

Neither of us have any other earnings, nor do we have interest beyond £1000 per annum.

So just to recap, and make sure I’ve got this right -

By transferring marriage allowance to my spouse who is about to do UFPLS on her SIPP at the same time as mine is in drawdown and we want to avoid paying tax if possible, wife can take £18330 and me £11250, totalling £29,580 whereas if we don’t do the marriage allowance bit, we could only take £29150 tax free? (These figures are on the basis that the first 25% of wife’s UFPLS is tax free).

Looks like it’s worth doing✔️

Dazed_and_confused

Curious, why the reference to £1,000 interest?

nor do we have interest beyond £1000 per annum.

Without Marriage Allowance wouldn't it be £29,166? You £12,500, wife £16,666 (of which 75%, £12,500, is taxable).

And with Marriage Allowance it would be £29,583 (£29,670 if she is Scottish resident for tax purposes).

Remember though that despite having no tax to pay this will mean your wife is classed as a basic rate payer. Which can have a huge impact if she has a deferred State Pension.

okydoky

No deferred state pension to worry about!!

Your figures are correct, mines were rounded just to make the point and to check I was in the right path 🤔

Thanks very much for your input - I’m not sure everyone would necessarily think of that in our circumstances?

By the way we are Scottish so the higher number applies👍

okydoky

Dazed_and_confused wrote: »

Curious, why the reference to £1,000 interest?



Without Marriage Allowance wouldn't it be £29,166? You £12,500, wife £16,666 (of which 75%, £12,500, is taxable).

And with Marriage Allowance it would be £29,583 (£29,670 if she is Scottish resident for tax purposes).

Remember though that despite having no tax to pay this will mean your wife is classed as a basic rate payer. Which can have a huge impact if she has a deferred State Pension.

Sorry but could you please spell out for me, where the difference actually comes from for being a Scottish resident?

I know we have a different start rate but I cannot get my head round your figures, an explanation would be much appreciated, many thanks in anticipation.

Dazed_and_confused

The £29,670 is made up of,

You: £11,250. Your reduced Personal Allowance is £11,250 so no tax payable.

Wife: £18,420.
£4,605 of this is TFLS leaving £13,815 taxable pension income.
Her tax liability would be,
£13,815 less Personal Allowance £12,500 = £1,315 income on which tax is charged
£1,315 x 19% (Scottish starter rate) = £249.85
Less Marriage Allowance tax credit £250.00 = £0.00 tax payable

NB. The £0.15 unused Marriage Allowance tax credit cannot be repaid to your wife, it is just lost. If she had £1 additional pension income then her tax liability would have been £250.04 leaving £0.04 payable after deducting the Marriage Allowance tax credit.

Dazed_and_confused

Possibly the thing that is confusing you is the Marriage Allowance. Being the recipient of this does not entitle your wife to an increased Personal Allowance.

It gives her a tax credit (£1,250 x basic rate of 20%) off her income tax liability.

So this works in your favour in this particular situation where she is only paying 19% tax (she can have more income taxed at 19% before the £250 Marriage Allowance credit is used up).

okydoky

Thank you very much for taking the time to provide such a detailed response.

I did get the concept but couldn’t get the numbers to tally, but thanks to your detailed workings I am totally comfortable with this now!

You mentioned earlier the consequences of being a basic tax payer against being a non tax payer for pension deferral - how does this work, and are there other implications other than the Savings nil rate and starter rate which I understand.

mgdavid

If you defer SP and then take it as a lump sum, you are taxed at the highest 'marginal' rate you currently pay.

So if you are a non-taxpayer the SP lump sum is also tax free.

If you have sufficient income that any of it is in the 20% band (19% in Scotland) then the lump sum is also taxed at that rate.

pensionpawn

Dazed_and_confused wrote: »

Possibly the thing that is confusing you is the Marriage Allowance. Being the recipient of this does not entitle your wife to an increased Personal Allowance.

It gives her a tax credit (£1,250 x basic rate of 20%) off her income tax liability.

So this works in your favour in this particular situation where she is only paying 19% tax (she can have more income taxed at 19% before the £250 Marriage Allowance credit is used up).

Which is surely equivalent to a basic personal allowance of £12500 / 0.9 = £13888.88 at present. Which could support tax free withdrawals from your pension of £18518.51 pa in the absence of any other earned income?