Marriage allowance - transferring 10% of personal allowance

aroominyork

The marriage allowance allows the transfer of 10% of personal allowance to a spouse or civil partner if the latter is a basic rate taxpayer. Is the transfer permitted if the receiving person earns over £50,270 but they made pension contributions which increased their basic rate band and kept them out of the higher rate band?

Dazed_and_C0nfused

aroominyork said:

The marriage allowance allows the transfer of 10% of personal allowance to a spouse or civil partner if the latter is a basic rate taxpayer. Is the transfer permitted if the receiving person earns over £50,270 but they made pension contributions which increased their basic rate band and kept them out of the higher rate band?

Income isn't relevant for Marriage Allowance eligibility.

Providing neither spouse is a higher rate payer and neither would be if it weren't for the dividend nil rate of tax (aka Dividend Allowance) then they are eligible.

[Deleted User]

The important figure is adjusted net income - gross pay less the pension payments that you have described grossed up  (presumed relief at source) less gift aid payments. 

For example:

Gross salary - £55000
Relief at source payment by you of £4000.

Adjusted net income is £50000 which is £55000 less the grossed up pension payment of £5000. 

You would need to claim the additional 20% relief on 4730 of the grossed up payment (55000 - 50270)

aroominyork

Dazed_and_C0nfused said:

aroominyork said:

The marriage allowance allows the transfer of 10% of personal allowance to a spouse or civil partner if the latter is a basic rate taxpayer. Is the transfer permitted if the receiving person earns over £50,270 but they made pension contributions which increased their basic rate band and kept them out of the higher rate band?

Providing neither spouse is a higher rate payer and neither would be if it weren't for the dividend nil rate of tax (aka Dividend Allowance) then they are eligible.

Trying to get my head around the double (or is it triple...) negatives. Transferror of the allowance has £2308 of dividend income (and £11,900 of earned income); recipient has £568 of dividend income. How does that affect things please? (I think the answer is 'does not affect it at all'.)

Dazed_and_C0nfused

For the transferor none (based on total taxable income of ~£14k).

For the recipient you will need to look at what the tax liability would be if you ignored the dividend nil rate band.

If that means higher rate tax would be charged then they wouldn't be eligible.

However this position could be improved depending on which tax year is involved?  

aroominyork

Likely to be FY23 only. Recipient would be basic rate taxpayer based on making pension contributions up to salary cap (using brought forward annual allowance).

Dazed_and_C0nfused

aroominyork said:

Likely to be FY23 only. Recipient would be basic rate taxpayer based on making pension contributions up to salary cap (using brought forward annual allowance).

Do you mean 2022-23 or 2023-24?

If still a basic rate payer when the dividend income is included but the nil rate band is excluded then they would be eligible.

aroominyork

I mean 2022-23. By "the nil rate band is excluded" do you mean the £2k (£1k this year) of tax-free dividend income? Is the example below correct of being a basic rate payer when dividend income is included but the nil rate band is excluded?

Earnings £47,000

Dividend income £5,000

Total income £52,000

Taxable income of £47,000 earnings (less personal allowance) and £3000 = £50,000, so all at basic rate since under £50,270.

Dazed_and_C0nfused

aroominyork said:

I mean 2022-23. By "the nil rate band is excluded" do you mean the £2k (£1k this year) of tax-free dividend income? Is the example below correct of being a basic rate payer when dividend income is included but the nil rate band is excluded?

Earnings £47,000

Dividend income £5,000

Total income £52,000

Taxable income of £47,000 earnings (less personal allowance) and £3000 = £50,000, so all at basic rate since under £50,270.

Dividends are only "tax free" in a S&S ISA, SIPP or similar tax free wrapper.

In the example you have provided the tax liability would normally be calculated like this.  Note the first £2,000 of dividend income uses some of the basic rate band which was unused after taxing the earnings.

Taxable income £52,000
Less Personal Allowance £12,570
Income to be taxed = £39,430

Earnings to be taxed = £34,430 (all at basic rate)
Dividends to be taxed = £5,000
£2,000 taxed at 0% (dividend nil rate band which uses some of the remaining basic rate band)
£1,270 taxed at 8.75% (dividend basic rate using the remaining basic rate band)
£1,730 taxed at 33.75% (dividend higher rate)

All of the above is based on the standard basic rate band, no increase for Gift Aid or RAS pension contributions

aroominyork

Understood, thank you. And since the recipient made c.£40,000 net/£50,000 gross of RAS pension contributions, their HRT threshold increased to £100,270 so they could receive a marriage allowance transfer.

Dazed_and_C0nfused

Don't know how someone with earnings of £47,000 for pension purposes has made a qualifying RAS contribution of £50,000 but the principle is correct.

Nome of the income would be in the higher rate band so they would still be eligible.

Same if the gross RAS contribution was £47,000.