Moving 10% of personal allowance to spouse in retirement, benefits and possible drawback.

pensionpawn

Consider the situation where husband and wife are both retired, no income from employment. Husband can transfer 10% of personal allowance to wife. Husband has taken his 25% TFLS and can draw down £11250pa tax free. Wife now has an effective personal allowance of £13889, which if she combines with UFPLS, allows her to draw £18518 tax free pa from her fund. Combined with her husbands reduced personal allowance the couple can access, across their two pension funds, £29768 tax free pa. Now my question is, if the husband needs to access more than his reduced allowance of £11250 in a tax year, does he pay just the 20% tax on the extra or is there some sort of penalty charge? The wife can draw above £18518, she's just pay tax accordingly. This method, as far as I can tell legitimately maximises your tax free income pa, however I'm not sure if it puts a 'straight jacket' on the amount the husband can withdraw without having to revert the allowance back to 100% - 100%? Any thoughts?

molerat

As far as the giver is concerned they simply have a lower tax allowance and pay any tax accordingly.  The receiver is usually the only one who can be subject to unexpected consequences such as tax on state pension lump sums as it is only their tax bill that is reduced, their tax allowance is still the same.

Dazed_and_C0nfused

Wife now has an effective personal allowance of £13889

Wife still only has a Personal Allowance of £12,500.   Plus a deduction of £250 of their income tax liability.

Will be a similar outcome for the majority but can have unexpected consequences for some as molerat says.

zagfles

The husband would just pay 20% tax on any pension income above £11250, no other adverse consequences.

Is this supposed to be some loophole to get a higher combined tax free allowance? Because it doesn't, if only income is pension income. Some strange effects can occur with dividend/interest income, savings nil rate band etc.

Where does the £13889 figure come from? The "effective allowance" is £13750, ie £12500 + 250/0.2

NedS

Where we are using our married couples tax allowance to good effect is by my wife giving me 10% of her allowance as she doesn't work allowing me to benefit in employment, and once we turn 55 she will be able to get all of her SIPP drawn down tax free using her lower allowance thus allowing me to get more out of my SIPP using the donated extra 10% allowance. So overall we pay less tax.

In a case where both members of the couple have enough income to fully utilise their tax free allowances, there is no benefit.

pensionpawn

Thanks for the comments so far. The £13889 was a 'typo' that I carried through in my calculations, hurried post before popping out this afternoon.
My figures should have been £12500 + 10% = £13750.
75% (the taxable element of UFPLS withdrawals) of £18333 is £13750
Hence £18333 can be accessed each year tax free.
Added to the husbands reduced personal allowance of £11250 generates £29583 of tax free pension 'income' for the year.
Hopefully that's cleared up any confusion from my OP.

Now the condition (for being allowed to transfer the 10% between spouses) that I'm seeking clarification on is
"you do not pay Income Tax or your income is below your Personal Allowance (usually £12,500)"
https://www.gov.uk/marriage-allowance
So if the husband needs to take more than £11250 out of his pension will he be just charged tax at 20% on the amount over £11250, or will this trigger some penalty as he has retrospectively breached the condition of transferring 10% of his personal allowance? The tax on the excess is obviously reasonable as a couple have a maximum combined tax allowance of £25k

Dazed_and_C0nfused

"you do not pay Income Tax or your income is below your Personal Allowance (usually £12,500)"

There is no such condition in the tax legislation.

The guidance you have linked to is about the benefit of Marriage Allowance, not who can be eligible.

The key thing is that neither the applicant or the recipient can be liable to higher rate tax.  So a couple both earning £40k are eligible for Marriage Allowance but are highly unlikely to benefit financially (as a couple) from applying.

If the applicants only taxable income is say £13,250 pension then they will pay tax on £2,000 of that income (at 19% or 20% depending on where they are resident for tax purposes).  There is no penalty as they are still eligible for Marriage Allowance.

pensionpawn

Dazed_and_C0nfused said:

"you do not pay Income Tax or your income is below your Personal Allowance (usually £12,500)"

There is no such condition in the tax legislation.

The guidance you have linked to is about the benefit of Marriage Allowance, not who can be eligible.

The key thing is that neither the applicant or the recipient can be liable to higher rate tax.  So a couple both earning £40k are eligible for Marriage Allowance but are highly unlikely to benefit financially (as a couple) from applying.

If the applicants only taxable income is say £13,250 pension then they will pay tax on £2,000 of that income (at 19% or 20% depending on where they are resident for tax purposes).  There is no penalty as they are still eligible for Marriage Allowance.

Thanks for that. So if your income is above the 'reduced to 90% of tax allowance' though below the normal threshold for higher rate tax, you just pay tax at 20% on the excess? The advantage of donating 10% of your tax allowance to a spouse accessing their pension via UFPLS is that it 'magnifies' your combined tax free pension 'income' to £29583 compared to £25000 (2 x £12500). An extra £4583 (18.3%) tax free income pa.

zagfles

pensionpawn said:

Dazed_and_C0nfused said:

"you do not pay Income Tax or your income is below your Personal Allowance (usually £12,500)"

There is no such condition in the tax legislation.

The guidance you have linked to is about the benefit of Marriage Allowance, not who can be eligible.

The key thing is that neither the applicant or the recipient can be liable to higher rate tax.  So a couple both earning £40k are eligible for Marriage Allowance but are highly unlikely to benefit financially (as a couple) from applying.

If the applicants only taxable income is say £13,250 pension then they will pay tax on £2,000 of that income (at 19% or 20% depending on where they are resident for tax purposes).  There is no penalty as they are still eligible for Marriage Allowance.

Thanks for that. So if your income is above the 'reduced to 90% of tax allowance' though below the normal threshold for higher rate tax, you just pay tax at 20% on the excess? The advantage of donating 10% of your tax allowance to a spouse accessing their pension via UFPLS is that it 'magnifies' your combined tax free pension 'income' to £29583 compared to £25000 (2 x £12500). An extra £4583 (18.3%) tax free income pa.

There is no extra tax free income. You (effectively) get a combined personal allowance of £25,000 whether you transfer or not. You get 25% of your pension tax free whenever you take it. Having a higher PA just allows you to take extra tax free cash in the form of UFPLS, you could get the same tax free cash out by phased drawdown if you really wanted it.

You seem to think you've found a loophole to get more tax free cash. You haven't.

garmeg

pensionpawn said:

Dazed_and_C0nfused said:

"you do not pay Income Tax or your income is below your Personal Allowance (usually £12,500)"

There is no such condition in the tax legislation.

The guidance you have linked to is about the benefit of Marriage Allowance, not who can be eligible.

The key thing is that neither the applicant or the recipient can be liable to higher rate tax.  So a couple both earning £40k are eligible for Marriage Allowance but are highly unlikely to benefit financially (as a couple) from applying.

If the applicants only taxable income is say £13,250 pension then they will pay tax on £2,000 of that income (at 19% or 20% depending on where they are resident for tax purposes).  There is no penalty as they are still eligible for Marriage Allowance.

Thanks for that. So if your income is above the 'reduced to 90% of tax allowance' though below the normal threshold for higher rate tax, you just pay tax at 20% on the excess? The advantage of donating 10% of your tax allowance to a spouse accessing their pension via UFPLS is that it 'magnifies' your combined tax free pension 'income' to £29583 compared to £25000 (2 x £12500). An extra £4583 (18.3%) tax free income pa.

You forgot the lower tax free cash in the non transfer scenario of £12,500 / 3 = £4,166 so you get £16,666 tax free from pension.

If transferred
£11,250+ £13,750x4/3 = £29,583

No transfer
£12,500 + £16,666 = £29,166.

The gain is therefore £417.

This is £1,250 / 3.

Not to be sniffed at, obviously.

OldBeanz

The regulations state that the giver has to be a non tax payer but I don't think the HMRC will chase anyone if the status 'happens' to  change.