Marriage Allowance - cancelling and backdating

Zanderman

Thoughts please, from anyone in the know, on a curious question that has just arisen this weekend when investigating Marriage Allowance rules. 

A few statements of fact first:

• When a married couple set up Marriage Allowance  - transferring 10% of one persons tax allowance to the other, it stays in place for ever unless cancelled. Which seems an odd way of doing things HMRC, but is perhaps often (but not always, see cancelling below) harmless.

• You can backdate Marriage Allowance , when setting it up, up to 4 years ago. Which seems perfectly reasonable and quite generous.

All this from info at https://www.gov.uk/marriage-allowance

If you want to cancel Marriage Allowance you can do so - either because of divorce, changes in circs, or simply because you want to (https://www.gov.uk/marriage-allowance/if-your-circumstances-change).  That sounds fine, in principle.

However...  (from https://www.gov.uk/marriage-allowance/if-your-circumstances-change). 

If you cancel because of a change of income, the allowance will run [i.e. will not be cancelled!!] until the end of the tax year (5 April).

If your relationship has ended, the change may be backdated to the start of the tax year (6 April).

So, if your income pattern, as a couple, changes within one financial year in a way that makes Marriage Allowance counterproductive, you're stuck with it for the whole of that year - you can't backdate the change (unless you divorce!).

When you set it up you could backdate 4 years. And HMRC leave the arrangement in place for the future  indefinitely.

But clearly it won't make sense for all couples forever as incomes and careers change, especially if there have been breaks for childcare etc. There will often be a need to cancel (or even swap it over) for many.  But if you cancel and/or swap it over, you can't actually cancel until the end of the year, which might be nearly 12 months away, and can't backdate at all.

So the allowance that is supposed to be a tax break can, in the year you cancel it, quite easily suddenly become a tax burden.

And it has the potential to run, as a burden not a break, for more than one year if people assume (not unreasonably) that a cancellation can be applied when they fill in your return - as they won't do that return until the second year they would have wanted it cancelled. So it could run again, unwanted, for the next year.

It just seems odd - that HMRC will allow an allowance to be (quite casually, and in an unplanned way) backdated 4 years but then won't allow the cancellation (for reasons which could be equally unplanned) of it to be backdated, indeed won't even allow a cancellation to take affect until next year.

Is my interpretation of this correct?  I'm just curious as it seems a peculiar set-up. Exacerbated, primarily, by HMRC assuming it's set-up for ever.

Brie

It's the "letting it fun forever" thing that I find bizarre.  I don't know anywhere else that a part of the government is so generous.  Maybe stopping and starting it is too much hard work? 

I mean, if you are getting a single supplement from our local council they will ever couple of years write and ask whether it still applies.  If you don't respond they cancel it and charge you from the beginning of that tax year at the full rate.  You then have to prove to them that no you still are and have always been a single occupant.  Which is difficult to prove because how do you prove something that doesn't exist??

sheramber

Backdating the start  could lead to a refund tax, which everybody likes.

But backdating the cancellation would result in an underpayment for the party who lost the allowance. Which nobody likes. 

If the party who gave up the allowance has an increase in income and starts to  pay tax at the lower figure but the receiving party will still pay less tax . so as a couple  there is no  loss. 

A pays extra tax but B still pays less tax. 

[Deleted User]

There's nothing casual or generous about HMRC accepting a claim backdating marriage allowance (or indeed any claim for tax relief) for 4 years; that's what the tax legislation allows.

HMRC has to follow the relevant tax legislation (set by Parliament) for marriage allowance, which includes cancellation.

The onus is on the individual to notify any changes which may affect eligibility.

I believe the same level of responsibility lies with the individual to notify their local council of changes which may affect their entitlement to SPD on council tax (which is governed by  completely separate legislation to income tax legislation).

Zanderman

sheramber said:

Backdating the start  could lead to a refund tax, which everybody likes.

But backdating the cancellation would result in an underpayment for the party who lost the allowance. Which nobody likes. 

If the party who gave up the allowance has an increase in income and starts to  pay tax at the lower figure but the receiving party will still pay less tax . so as a couple  there is no  loss. 

A pays extra tax but B still pays less tax. 

You're missing my point.

The point I was making relates to circumstances where it is actually disadvantageous to carry on with the original  arrangement. Not cancelling and backdating just for the sake of it (that would be silly), but because it would be better.

An example: 
So if John and Jill have the arrangement in place when John earns 15k and Jill earns 10k, it's great. Jill gives some of her allowance to John and overall they pay less tax. That can go on for years, and it works fine.

But if one year John loses his job and gets another earning, say, 10k. Or simply goes part time and earns 10k. And in the same year Jill takes on more work and finds she's earning 15k. The tables are turned income-wise. But the old arrangement is still in place. Jill has gifted John some of her tax allowance. But that doesn't reduce John's tax. It simply means she has to pay more herself. More, indeed, than she would have paid without any marriage allowance system at all. 

So, when they do their tax return, early the next financial year, they try to cancel the arrangement. And they find they cannot. HMRC say that it can only be removed at the end of the new tax year (i.e. the one they've just started). So they are doomed to pay extra tax on Jill for the previous year AND the next one. Because they cannot cancel immediately, and they cannot back date cancelling.

They're penalised for changing their income pattern, simply because HMRC's set-up for this allowance cannot seem to handle the concept of income patterns changing. So instead of being help, they're hindered.

Which brings me back to the question I was asking - am I misinterpreting this set-up?

Curiousguy said:

There's nothing casual or generous about HMRC accepting a claim backdating marriage allowance (or indeed any claim for tax relief) for 4 years; that's what the tax legislation allows.

HMRC has to follow the relevant tax legislation (set by Parliament) for marriage allowance, which includes cancellation.

The onus is on the individual to notify any changes which may affect eligibility.

I believe the same level of responsibility lies with the individual to notify their local council of changes which may affect their entitlement to SPD on council tax (which is governed by  completely separate legislation to income tax legislation).

My point is not about eligibility - you merely have to be married to be eligible.

But the point is about notification. The individual can notify - no problem with that at all.  But that notification, if I'm reading it correctly, does not result in change until a year later, possibly two years later .

Which brings up the question again - am I misinterpreting this set-up?

Jeremy535897

I think sheramber has pointed out in the past that, in the circumstances you describe, John can make an election for the current year to transfer his marriage allowance to Jill. That supersedes Jill's ongoing election in favour of John. Not entirely obvious from the wording in section 55D ITA 2007, but perhaps worth a try anyway.

sheramber

Yes, John can request transfer of marriage allowance from his personal   allowance to Jill as he does not need it. 

If their circumstances change during the year then they notify HMRC immediately to remove the transfer from the end of that year. 

If John has extra personal allowance he can request transfer for the previous year.

Alternatively, you can request the transfer for the current year only by immediately cancelling , once the claim is processed. If appropriate, do the same each year. 

Or only claim after the end of each year for transfer for the previous year. 

why are they completing a tax return? 

[Deleted User]

No, your not misinterpreting the "set up" your understanding about timing is correct.

I think perhaps the point you're missing is that it's an election made by one spouse/civil partner, not a joint election.

I've just read the legislation.

It's an election to transfer part of the personal allowance, with a 4 year backdating rule.

The election remains in place until is it withdrawn and there are rules about the time for notifying withdrawal of an election.

Others have set out above how and when each spouse/civil partner should make/withdraw an election when incomes change.

sevenhills

Brie said:

It's the "letting it fun forever" thing that I find bizarre.  I don't know anywhere else that a part of the government is so generous.  Maybe stopping and starting it is too much hard work? 

I recall claiming for uniform and meals out tax allowances, I have no idea if they are both still applicable.

Zanderman

Thanks for the replies!  Comments below in the quotes

sheramber said:

Yes, John can request transfer of marriage allowance from his personal   allowance to Jill as he does not need it. 
Well, yes, of course he can, the point is not whether he can but the timing

If their circumstances change during the year then they notify HMRC immediately to remove the transfer from the end of that year. 
Yes, but again the point is the change they request may be applicable (from their point of view) from the start of the year. Why is the request forward-dated? The scheme seems to suggest couples must be able to predict their income pattern up to a year in advance - and yet tax returns - to report income - are completed after each year, not before the year. It just seems an odd approach. 

If John has extra personal allowance he can request transfer for the previous year.

This may be the key - in part at least - that if cancelling the arrangement the other partner can re-start it to run the other way round and  backdate that re-start.  However it doesn't cover all eventualities - as far as I can see -  as you can only backdate a new allowance election, not a cancellation. 

So if, in an alteration to my scenario above, Jill and John unexpectedly have equal incomes one year, both more or less at the (standard) personal allowance, then marriage allowance set either way would be a disadvantage. So they simply want to cancel for that year - but they can't. They can only cancel for the next year. And they can't backdate cancelling. Only new set-ups.

Alternatively, you can request the transfer for the current year only by immediately cancelling , once the claim is processed. If appropriate, do the same each year. 

Or only claim after the end of each year for transfer for the previous year. 
Both of those would probably work, though it seems a clumsy way to achieve something that should be simple!

why are they completing a tax return? 

I don't know, they're not real! (though these scenarios are based on discussions I've had with relatives with young children whose income patterns have recently altered a lot, and are about to alter more. Might even apply to me and Mrs Z-man in the next few years, not because of children (far too old!) but because we're shifting into lower income and gradually increasing pensions).  

Many people wouldn't be doing a return of course, though they might be self-employed/freelancers/gig economy workers. A tax return is, to me (but obviously not to HMRC!), the logical moment to set these things into play/alter them. 

Curiousguy said:

No, your not misinterpreting the "set up" your understanding about timing is correct.
Thanks for confirming. 

I think perhaps the point you're missing is that it's an election made by one spouse/civil partner, not a joint election.
I don't think I am missing that point, it's clear to me that an election has to be made by one partner - that doesn't alter the situation about timing and cancelling and backdating at all. And it's that angle I'm querying, not who makes the election.

I've just read the legislation.

It's an election to transfer part of the personal allowance, with a 4 year backdating rule.

The election remains in place until is it withdrawn and there are rules about the time for notifying withdrawal of an election.
Thanks, that suggests that these rules aren't weird HMRC ones, but weird legislative ones, that doesn't make them any less odd though!

Others have set out above how and when each spouse/civil partner should make/withdraw an election when incomes change.
Indeed, but as said in this reply, the make/withdraw systems do seem illogical. And must come as a surprise to many. And could, in the particular scenario I've put above in this answer (both earning the same, but at the default allowance threshold, in one year) lead to unrecoverable extra tax paid. Unless I'm getting that wrong.

Basically it seems to be the Marriage Allowance system is flawed by that odd 'ongoing until cancelled' assumption - and can only be practically managed by, as sheramber suggests, by setting it up and immediately cancelling every year, as that's the only way to get it to run one year at a time. 

And (edited to add) not setting it up, i.e. not making an election, until you as a couple are sure of what your paired income pattern is each year, so not doing it until relatively late in each financial year. As you may not want it at all.

Paulleach

An important point on Married Persons Allowance for 2024/25
The proposed state pension for 24/25 is £221.20 which doesnt sound a fortune but is an annual rate of £11502.40 which is higher than the allowance left after swapping the Married persons allowance to a partner, which only leaves £11,310. 
You cant cancel it in year if it's just because your income changes, which effectively it does, so, if i understand it correctly, lots of people will need to cancel the married persons allowance this year or pay tax of around £38.74 at the end of the tax year. Presumably  they will have to fill in a tax form too.
Does anyone else think my understanding is correct?