Marriage Allowance - what exactly counts as income?

jf20938

Last year (2019-20), I strayed into the Higher Rate Tax band and didn't benefit from a Marriage Allowance transfer, kindly applied for by my non-taxpaying wife. I was lazy and assumed that my Higher Rate Tax band threshold would be increased by £1,250. Of course, it doesn't work that way and I took slightly too much income from my SIPP.  Bah... lesson learned. 

Now in 2021 and looking ahead to the end of this tax year, I want to avoid a repeat. Because I can flex my SIPP income, I've arranged my combined pension payments to fall just short of the Higher Rate band. 

But I've just noticed that my income from dividends, although still within the dividend allowance, will bring my TOTAL gross income above the £50k threshold.  I had initially though that I'd be safe (for example, reading "Marriage Tax Allowance - Get a tax break worth up to £1,188" in MSE last December) but some websites suggest the £50k cut-off for Marriage Allowance is decided BEFORE the Dividend Allowance is applied. One states "...This can cause some difficulty where a claim to marriage allowance is made because the legislation requires that the tax rate payable by the taxpayer is hypothetically calculated by disregarding the dividend allowance."

Even the HMRC website is not explicit. The "How it works" section reads: "You should call the Income Tax helpline instead if you receive other income such as dividends, savings or benefits from your job". 

I will call HMRC this week, but I want to be prepared so thought to reach our here for comments and experiences of others.

Dazed_and_C0nfused

Dividend income which is taxed at the dividend nil rate and falls within the higher rate band makes you ineligible for Marriage Allowance.

It is part of the Marriage Allowance legislation and covered by LITRG.

https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-allowances-am-i-entitled

jf20938

Dazed_and_C0nfused said:

It is part of the Marriage Allowance legislation and covered by LITRG.

Thank you. That is an excellent reference which I'd failed to find in my own searches.  Yes, it's pretty clear:

"When calculating the highest tax rate at which either spouse is liable you should ignore the dividend nil rate band (dividend allowance) and consider whether the dividend income would be liable to the dividend upper rate (32.5%) were it not for the dividend nil rate band."

That's not a difficult concept so a big raspberry to the HMRC site for not providing the detail.

It would be really helpful if the MSE article from December (link... moneysavingexpert.com/family/marriage-tax-allowance/) was expanded to include my situation. That article explores some interesting situations when Marriage Allowance Transfer gives little benefit or is even counter-productive. My circumstance is another nuance that's along similar lines.

Perhaps a new section:  "Be careful if the non-taxpayer is only just below the tax threshold". 

Thanks again,  J.

Dazed_and_C0nfused

Indeed!

In fact the reference to non taxpayer is equally misleading as there is no such legislation.

Two people each earning £40k are both eligible (but won't normally benefit).

And a couple where one person is liable at 7.5% on dividends can also benefit in unexpected circumstances i.e. applicant deliberately makes themselves liable on an extra £1,250 of dividends taxed at 7.5% (£93.75) whilst the recipient gets £250 knocked off their liability.