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

zagfles

molerat said:

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.

This is entering the realm of extreme pedantry and insignificance, BUT, where do you get those fractional amounts? My year end PAYE tax paid (basic rate) is always EXACTLY ((pay excluding pence) minus (tax code with a 9 on the end)) x 0.2.  

For instance with pay of £32333.11 and tax code 1250L the tax paid would be (32333 - 12509) *0.2 = £3964.80

Dazed_and_C0nfused

Have a look at Pay Adjustment table A

https://www.gov.uk/government/publications/tables-a-pay-adjustment-tables

pensionpawn

michaels said:

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.

Nope, however I did get some of my numbers confused in earlier posts.

pensionpawn

zagfles said:

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.

I agree that you can't take more out of the pot than is in there, unless the pot grows, which of course we all hope it does, and at a decent rate. If the starting amount of the pot, coupled with the growth rate, supports withdrawals at £18333 pa then there is year on year gain. The pot may be smaller when you croke it, however I'm planning a retirement, not an inheritance.

zagfles

pensionpawn said:

zagfles said:

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.

I agree that you can't take more out of the pot than is in there, unless the pot grows, which of course we all hope it does, and at a decent rate. If the starting amount of the pot, coupled with the growth rate, supports withdrawals at £18333 pa then there is year on year gain. The pot may be smaller when you croke it, however I'm planning a retirement, not an inheritance.

The only benefit of using this method would be if the husband didn't have a big enough pot to utilise his full personal allowance every year over his retirement. And that's what the marriage allowance is designed for.

The wife can take as much of the 25% tax free portion out of the pension as she wants each year, it doesn't have to be in the form of a UFPLS, it can be using phased drawdown where some of the pot is crystallised but not drawn. Transferring the allowance just allows her to take £1250 more in taxable income without getting taxed, but at the same time reduces the amount of taxable income the husband can take without being taxed. 

It's completely neutral for couples where they both have sufficient pension to utilise their own personal allowance.

TBC15

There seems to be a slight advantage for those north of the border. My wife gave me 10% of her allowance and I ended up with an allowance of 13815.

molerat

No advantage - you must be a 19% taxpayer so get an extra allowance of £1250 *.2/.19 = £1315 which still saves you £250 off your tax bill. I had the same last year but moved to 20% this year so get the normal £13750.

TBC15

Surely 13815+11250 is a bigger number than 13750+11250?

molerat

The tax code is only a way of trying to collect the correct amount of tax. The marriage allowance does not give you higher personal allowance, it simply deducts £250 from your tax bill.  Your tax code is adjusted on a best guess of your personal situation for the year.  If you become a 20% tax payer in the year you will owe some tax due to you being given the 19% adjustment for marriage allowance.

Tax saved on £1250 at 20% = £250, tax saved on £1315 at 19% = £249.85.

If you were a 21% tax payer the allowance would be £1190 so a total of £13690, tax saved on £1190 at 21% = £249.90.

Dazed_and_C0nfused

You cannot have a Personal Allowance greater than £12,500.

Being the recipient of Marriage Allowance, irrespective of whether you are resident in England, Scotland, Wales or Northern Ireland, gives you a tax deduction of £250 off your tax liability.

To ensure you receive the benefit of this £250 during the tax year your tax code allowances are increased.  For most people the additional tax code allowance is £1,250 (x 20% = £250) but for Scottish residents it can be £1,191 (x 21% = £250.11) or £1,316 (x 19% = £250.04).

https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye100035#:~:text=Scottish taxpayers are entitled to,intermediate rate band or below.&text=A basic rate customer will,21% = £250.11).