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Tax rate: a world record? Marriage Allowance

/ 7 February 2022

Geraint Jones

What’s the highest tax rate you’ve encountered? 45%?  50%? The 98% rate of the 1970s?

How does 25,000% sound?  Well, 25,240% to be precise.

It’s to do with the ‘Marriage Allowance’.  This lets you transfer 10% of your personal allowance (so £1,260 for the current tax year) to your spouse or civil partner.  It can make sense if your own taxable income is less than the personal allowance (£12,570 for the current tax year).

However, it’s not possible to make the transfer if the transferee is paying tax at the higher or additional rate of tax.  And because it’s an all-or-nothing transfer, the ‘cliff edge’ effect at income around the basic rate limit can be startling.

Consider George and Mildred.  George’s taxable income for the current year is just £10,000.  Mildred’s is £50,270.  Making the transfer does not increase George’s tax bill but reduces Mildred’s by £1,260 x 20% = £252.

What if Mildred earns an extra £1 of income?  Then she will be a higher-rate taxpayer, the Marriage Allowance will be unavailable and that extra £1 of income will have increased her tax bill by £252.40 – so 25,240%.

But it cuts both ways.  Consider Harry, whose income is £50,271 and his wife Meghan, with £10,000.  No capacity for Marriage Allowance there.  But if Harry makes a Gift Aid payment to charity of 80p his basic rate band is extended by the grossed-up amount of £1, he ceases to be a higher-rate payer and (assuming Meghan agrees to the transfer – and why wouldn’t she?) his tax bill goes down by £252.20 – and the charity gets a tax refund of 20p to boot.  Not a bad return on an investment of 80p.

The examples are of course extremes.  But it’s a point to look out for if you are within a couple of pounds of paying (or escaping from) higher-rate tax and have a spouse or civil partner of modest means.

For more information, please get in touch with your usual BKL contact or use our enquiry form.

Geraint Jones

Partner, Private Client Tax

T +44 (0)20 8922 9354
E geraint.jones@bkl.co.uk

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