Marriage allowance and non earned income / UFPLS withdrawals. 20 January at 1:03PM in Pensions, annuities & retirement planning 11 replies 291 views

pensionpawn

So everything I've read so far is in the context of person A has an income / draw down below the PA and transfers the MA to person B who is employed and earns above the PA (and below 40% threshold). No problem with that. What about:
1. Person B is also retired. Do the rules (if they're not restricted to just earned / employed taxable income?) of MA allow person B to draw down 110% of the PA from their pension with the MA cancelling out the tax levied on the 10%? In other words does person B have to be employed, or do they just have to have taxable income above the PA?
2. If 1 above is permissible is person A allowed, via UFPLS, to draw 33.3% above the PA so when 25% is extracted they are at (or a £1 below) the PA and are therefore allowed to transfer the MA to person B? Again the test again is just on taxable income.
Thanks in advance.

Dazed_and_C0nfused

The rules around Marriage Allowance are relatively straightforward.

Providing both parties are not deemed higher rate payers then either one is eligible to apply.  And the other spouse will get the benefit of Marriage Allowance.

So a couple both with taxable income of £40k are eligible.  But apart from in niche circumstances there is absolutely no point in applying for it as there would be no benefit for them overall.

The applicant has a reduced Personal Allowance, currently £11,310.

The recipient has the standard Personal Allowance of £12,570 and a deduction of £252 off whatever their tax liability is.

molerat

We are both pensioners and even though MrsM has become a tax payer we still benefit as a couple from the marriage allowance.  This year though the benefit is down to £60 and next year down to £10 so will consider cancelling from 24-25.

pensionpawn

So by person A (not employed) giving the MA to person B, person A (not employed) can withdraw £15080 via UFPLS (only £11310 is taxable) and person B can withdraw (not via UFPLS) £13830 and pay £252 tax on £1260 which is cancelled out by the MA resulting in a total of £28910 tax free for persons A & B?

Dazed_and_C0nfused

Person A wouldn't pay any tax on non savings non dividend income of £11,310.

Person A could also earn a total of £6,000 in interest and £2,000 in dividends all of which would be taxed at 0%.  Making a total of £19,310 taxable income with no tax to pay.

If person B wasn't Scottish resident for tax purposes then wouldn't actually need to pay any tax on non savings non dividend income of £13,830.  But they would have used £1,260 of their basic rate tax band meaning they only had £3,740 of the savings starter rate band available.

They could earn £4,740 in interest and £2,000 in dividends all of which would be taxable at 0%.  Making a total of £20,570 taxable income with no tax to pay.

So between them they could have a total of £39,880 in taxable income without having any tax to pay.  If they were in the fortunate position of being able to generate that level of pension, interest and dividend income.

zagfles

pensionpawn said:

So by person A (not employed) giving the MA to person B, person A (not employed) can withdraw £15080 via UFPLS (only £11310 is taxable) and person B can withdraw (not via UFPLS) £13830 and pay £252 tax on £1260 which is cancelled out by the MA resulting in a total of £28910 tax free for persons A & B?

Yes, so what? You're not thinking this is some kind of clever loophole to get more tax free cash are you, I think we've been here before! They're just using both PAs plus person A is taking a portion of their tax free 25%

The only point in doing this would be if person A doesn't have a big enough pension to use up their PA every year over their retirement. That's what the MA is for.

molerat

There can be a slight benefit in Scotland of the donor paying 19% tax on the £1260, so £239.40, and the recipient getting a tax reduction of £252.

Dazed_and_C0nfused

And this is a very niche scenario but it could allow directors to take a bigger dividend without incurring tax.

£2,880 of dividend income (taxed above the dividend nil rate) could incur a liability of £252.  Reduced to nil by the MA credit.

zagfles

Dazed_and_C0nfused said:

And this is a very niche scenario but it could allow directors to take a bigger dividend without incurring tax.

£2,880 of dividend income (taxed above the dividend nil rate) could incur a liability of £252.  Reduced to nil by the MA credit.

But where is the advantage unless the donor isn't using their full PA? Donor will pay £252 more tax, donee will save £252 tax. Am I missing something? Or is this Scotland specific?

pensionpawn

zagfles said:

pensionpawn said:

So by person A (not employed) giving the MA to person B, person A (not employed) can withdraw £15080 via UFPLS (only £11310 is taxable) and person B can withdraw (not via UFPLS) £13830 and pay £252 tax on £1260 which is cancelled out by the MA resulting in a total of £28910 tax free for persons A & B?

Yes, so what? You're not thinking this is some kind of clever loophole to get more tax free cash are you, I think we've been here before! They're just using both PAs plus person A is taking a portion of their tax free 25%

The only point in doing this would be if person A doesn't have a big enough pension to use up their PA every year over their retirement. That's what the MA is for.

Precisely!

pensionpawn

zagfles said:

pensionpawn said:

So by person A (not employed) giving the MA to person B, person A (not employed) can withdraw £15080 via UFPLS (only £11310 is taxable) and person B can withdraw (not via UFPLS) £13830 and pay £252 tax on £1260 which is cancelled out by the MA resulting in a total of £28910 tax free for persons A & B?

Yes, so what? You're not thinking this is some kind of clever loophole to get more tax free cash are you, I think we've been here before! They're just using both PAs plus person A is taking a portion of their tax free 25%

The only point in doing this would be if person A doesn't have a big enough pension to use up their PA every year over their retirement. That's what the MA is for.

....and the original post was meant to say person B is also not employed. Hence is MA permissible between a married couple neither of whom are employed? Molerat's post seems to suggest the answer is yes...