Marriage Allowance - What if my tax code is less than 1250L? (plus timing question added)

zagfles

RG2015 said:

Dazed_and_C0nfused said:

Ok, just you had previously said,

No i didn't pay any tax, that's why I didn't push to get my code amended before now.

Which seemed to suggest you thought there was something wrong with it.  There are regular posters on here and the savings board who seem to thing they are entitled to the savings nil rate band (aka Personal Savings Allowance) when their income is far too low for it to be available (or of use) to them and seem to think their tax codes are wrong because interest in included as a tax code deduction.

I believe that many people use logic, semantics and common sense to interpret tax rules. Sadly, tax rules often fail to comply with these basic tests.

HMRC themselves refer to the nil rate tax band as a personal savings allowance, so it is little surprise that many people assume that this is a tax allowance. The personal allowance of £12,500 leads to a basic tax code of 1250 so many people assume that the tax code and tax free allowance are interchangeable after applying an arithmetical conversion factor of 10.

I also believe that experienced users do not help the uninitiated by appearing to berate them for their understandable lack of knowledge. This in turn leads to wholly unnecessary arguments about the interpretation of confusing tax rules. 

The issue here isn't around tax rules, definitions of allowances, ability to use allowances etc. It's about what the purpose of a tax code is. As clearly demonstrated by the way HMRC use tax codes in the examples I gave above, eg HRT payers paying into a pension, the purpose of a tax code is to try to collect the correct amount of tax through PAYE. Not reflect how much PA is available.

If you take an example of someone predicted to earn £11,000 (pay or pension) and £500 interest, no MA transfer or other complications. How does reducing their tax code from 1250L to 1200L help? If they earn £11,000 as expected or less, it makes no difference whatsoever, zero tax. So reducing the code has no effect.

But if their income increases a bit, say they get a bonus/do overtime in the last tax month of the year. Or if it's a pension, increase their drawdown, and they end up earning £13k. They will now pay too much tax, they'll pay £200 instead of the correct amount, £100. They will then need to reclaim £100.

If HMRC had just left their tax code at 1250L, the correct amount of tax would have been deducted whether or not their employment/pension income changed, or interest, unless it was massive.

So yes, it is wrong for HMRC to deduct interest from the tax code of people earning below the PA, unless they expect their interest to be over £6000. But I imagine the PAYE system hasn't been properly updated with the changes a few years ago to the way taxation of interest works.

Sea_Shell

Sea_Shell said:

The plan is....

DH turns 55 in Sept 2021, so in the Apr 2021-2022 tax year.
Currently not working, not a tax-payer.
He has 2 small pots totalling £9100, which he'll take at 55.
He'll also earn approx £1500 in interest, during that period
He'll take 25% lump sum from other DC pensions (approx £40k), but NOT start drawdown.   Re-invest in our ISA's.

In May 2022, he'll start drawdown of his DC's, set to the max he can withdraw per month, £1145 pm gross (based on current allowances).

We'll either live off this, or spend cash float and re-invest, depending on market conditions.

This will then be re-evaluated once DB and state pensions come into play (65+)

I'm not 55 until 2026.

Just following on from this post, and what to do about the timing of claiming the Marriage allowance.    

I was hoping to get our ducks in a row early, but it appears that my husband would have to be earning over the PA, NOW, for us to start a claim?    During this tax year, his taxable income is likely to JUST fall within the PA, depending on the values of the small pots at the time taken, so can we not make a claim for this until after he actually starts the drawdown, and has taxable income over the PA, ie not until the 2022-23 tax year?

Currently the small pots are £2700, £7000 and £6200  (we found out he had an extra one, that is a part pot and can be taken separately)

These total approx. £15,900, of which 25% will be tax free.  Leaving £11,925 taxable.   So he won't be a taxpayer during the 21-22 tax year.

So do I have to wait until the 22-23 tax year to apply, once he actually starts drawdown, that will be over the PA?

Dazed_and_C0nfused

There are no rules around income and Marriage Allowance.  What matters is the tax rate you are liable at.

Husband and wife both earnings £40k are both eligible.  One earning £80k but only liable to basic rate tax is eligible.

Don't forget when it comes to Marriage Allowance eligibility and being able to benefit are two completely different things.

Sea_Shell

Dazed_and_C0nfused said:

There are no rules around income and Marriage Allowance.  What matters is the tax rate you are liable at.

Husband and wife both earnings £40k are both eligible.  One earning £80k but only liable to basic rate tax is eligible.

Don't forget when it comes to Marriage Allowance eligibility and being able to benefit are two completely different things.

But won't it let me apply if I tick that both myself and husband currently have no earnings.   You have to tick that "yes, my spouse has earnings of between x and y" being the PA and higher rate tax band figures (which i can't now remember off the top of my head).   He doesn't, and is unlikely to have in the current tax year.   that's what's confusing me.  I bailed out of the application at that point.

Jeremy535897

Sea_Shell said:

Dazed_and_C0nfused said:

There are no rules around income and Marriage Allowance.  What matters is the tax rate you are liable at.

Husband and wife both earnings £40k are both eligible.  One earning £80k but only liable to basic rate tax is eligible.

Don't forget when it comes to Marriage Allowance eligibility and being able to benefit are two completely different things.

But won't it let me apply if I tick that both myself and husband currently have no earnings.   You have to tick that "yes, my spouse has earnings of between x and y" being the PA and higher rate tax band figures (which i can't now remember off the top of my head).   He doesn't, and is unlikely to have in the current tax year.   that's what's confusing me.  I bailed out of the application at that point.

If neither of you has any taxable income in a year, there is no point in making the election, because there is obviously no tax reduction for the transferee spouse in that tax year (no tax being due), and the legislation provides in section 55D(5) ITA 2007:
"55D(5)If an individual’s spouse or civil partner does not obtain a tax reduction under section 55B in respect of a tax year in which an election is in force the election ceases to have effect for subsequent tax years; but this does not prevent an individual making a further election for the purposes of section 55B(2)(a) (whether or not in relation to the same marriage or civil partnership)."

The result of your election would therefore be no tax saving followed by its cancellation. Wait until the transferee spouse will be able to take advantage of the election.

Sea_Shell

Thanks Jeremy.  I didn't realise that it would get cancelled if not "used", I thought it would just sit there "ready" and kick in as and when.

So basically I need to cool my heels until April 2022. 😉

Dazed_and_C0nfused

In practice it only gets cancelled if either of you are ineligible. 

Not using the Marriage Allowance tax credit doesn't make you ineligible.

Jeremy535897

Dazed_and_C0nfused said:

In practice it only gets cancelled if either of you are ineligible. 

Not using the Marriage Allowance tax credit doesn't make you ineligible.

The danger is that if you rely on practice, you may overlook a cancellation if they choose to follow the law.

Sea_Shell

I take it that, if in September the net income from his small pots does exceed his PA, even if only slightly, I can give over the extra, so that little bit of tax can be saved?

Jeremy535897

You transfer one tenth of your personal allowance to your husband if you make the election. If you still have no taxable income after the transfer, you cannot be worse off, and even if he only has £1 of taxable income before the transfer, he will be better off (in that case by 20p).