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

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.

pensionpawn

garmeg said:

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.

Yes, thanks for that! I just frustratingly lost my browser tab about the article which brought my attention to this strategy. Some financial adviser exploring options for maximising tax free pension access and this was exactly the point he was making, the extra £417 pa, not the £4583 I posted in haste (which is mainly the 25% TFLS element). The £417 is the real gain from this approach. Cheers.

pensionpawn

OldBeanz said:

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.

Yes, that is the main concern. If the wife accesses £18333 tax free after receiving the 10% uplift from the husband, and at the end of the same tax year the husband has to dip into his pot beyond his £11250 allowance, what then? Emergency tax bill, or just taxed on the excess at 20% Really need to know in advance to avoid nasty surprises.

Dazed_and_C0nfused

Emergency tax bill, or just taxed on the excess at 20% Really need to know in advance to avoid nasty surprises.

The end outcome is that additional tax will be due at 20%.

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.

That isn't actually what the legislation states.  The giver cannot be a higher rate payer but they do not need to be non tax payer.  For example you could be liable to tax at 7.5% and apply for Marriage Allowance knowing you will pay an extra £93.75 (7.5% on £1,250) but your spouse will get the Marriage Allowance tax deduction of £250 so as a couple you are £156.25 better off.

zagfles

pensionpawn said:

garmeg said:

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.

Yes, thanks for that! I just frustratingly lost my browser tab about the article which brought my attention to this strategy. Some financial adviser exploring options for maximising tax free pension access and this was exactly the point he was making, the extra £417 pa, not the £4583 I posted in haste (which is mainly the 25% TFLS element). The £417 is the real gain from this approach. Cheers.

The gain is zero. You're just taking more of the tax free portion of the wife's pension now, so there'll be less later. 

If that's what you need it might make it a bit administratively easier than phased drawdown, but there is no magic extra tax free allowance being created.

molerat

We have calculated that next year MrsM will be a tax payer but as her income will be below the full allowance we will still be better off especially as she will pay that tax at 19%.  Also putting the lower earner just into paying tax can be of slight benefit due the £9 PAYE tax code quirk.

michaels

I think the OP is thinking the TFLS is 25% of the annual drawdown rather than realising that it is 25% of the pension pot.

OldBeanz

molerat said:

We have calculated that next year MrsM will be a tax payer but as her income will be below the full allowance we will still be better off especially as she will pay that tax at 19%.  Also putting the lower earner just into paying tax can be of slight benefit due the £9 PAYE tax code quirk.

 "the £9 PAYE tax code quirk." This is a new one on me - any further info?

molerat

OldBeanz said:

molerat said:

We have calculated that next year MrsM will be a tax payer but as her income will be below the full allowance we will still be better off especially as she will pay that tax at 19%.  Also putting the lower earner just into paying tax can be of slight benefit due the £9 PAYE tax code quirk.

 "the £9 PAYE tax code quirk." This is a new one on me - any further info?

With a tax allowance of £12500 and a code of 1250 with the PAYE system you only get taxed over £12509.16 if monthly paid or £12509.64 if weekly so effectively get another £1.83 / £1.93 free.  With a split code this happens on both codes and if two of you are paying tax both of you will get this extra £1.83 / £1.93.  It doesn't always work though if your tax allowance (not code) ends in a number other 0 as the code is rounded down and it is less in Scotland due to the 19% band.  Of course if you go for a tax assessment they use the actual tax allowance.

zagfles

OldBeanz said:

molerat said:

We have calculated that next year MrsM will be a tax payer but as her income will be below the full allowance we will still be better off especially as she will pay that tax at 19%.  Also putting the lower earner just into paying tax can be of slight benefit due the £9 PAYE tax code quirk.

 "the £9 PAYE tax code quirk." This is a new one on me - any further info?

PAYE codes chop the last digit off the end of the tax code, and the tax free allowance it gives is the number in the tax code with a 9 on the end.

For instance, if the tax free amount is just the personal allowance, £12500, the tax code would be eg 1250L, and the PAYE system would give 12509 allowance. Giving you £9 more allowance, saving you £1.80 in tax over the year if you're a basic rate taxpayer.