Six ways that marriage can reduce your tax bill.
Six ways that marriage can reduce your tax bill.
Introduction.
Marriage can bring significant financial benefits, particularly when it comes to reducing your tax bill. The UK tax system provides several allowances and exemptions specifically designed for married couples and civil partners. Understanding these can help you optimise your finances and potentially save a significant amount each year.
1. The Marriage Allowance: A simple way to save on income tax.
The Marriage Allowance is one of the most accessible ways for married couples or civil partners to reduce their tax bill. It allows one spouse to transfer a portion of their unused Personal Allowance to the other, lowering the amount of income tax the higher earner needs to pay.
What is a Personal Allowance?
The Personal Allowance is the amount of income you can earn each tax year without paying income tax. This amount can change, so checking the current threshold is essential.
How does the Marriage Allowance work?
If one spouse earns less than the Personal Allowance, they won't use all of their tax-free income. The Marriage Allowance lets them transfer a portion of this unused allowance to their partner, effectively lowering the partner's taxable income and reducing their tax bill.
What are the eligibility criteria for the Marriage Allowance?
You must be married or in a civil partnership.
One partner must be a non-taxpayer (earning less than the Personal Allowance).
The other partner must be a basic-rate taxpayer.
What is the application process for the Marriage Allowance?
You can apply for the Marriage Allowance online through the HMRC website. The process is straightforward, requiring basic details like National Insurance numbers and identity verification. Additionally, you can backdate claims for up to four tax years, which might result in a larger tax refund.
How to learn more.
For more detailed and up-to-date information, visit the GOV.UK Marriage Allowance page.
2. Capital Gains Tax: Benefit from spousal transfers to save tax.
Capital Gains Tax (CGT) applies when you make a profit from selling assets such as property (excluding your primary home), shares, or investments. However, marriage offers a significant advantage in terms of CGT, as couples can transfer assets between each other without triggering this tax.
What is Capital Gains Tax?
Capital Gains Tax is a tax on the profit made when you sell or dispose of an asset that has increased in value. The tax is only on the gain, not the total sale price.
How do spousal transfers work?
Married couples and civil partners can transfer assets between themselves without incurring Capital Gains Tax. This means that if one spouse is in a lower tax bracket or has unused CGT allowance, transferring assets such as shares, property (excluding your primary home), or investments to them before selling can result in a lower overall tax bill.
An example of Spousal Transfers:
If you own shares that have increased in value, you could transfer them to your spouse, who might be able to sell them using their own Capital Gains Tax allowance, thus reducing or eliminating the Capital Gains Tax due.
How to learn more.
For the most current CGT rates and allowances, refer to the GOV.UK Capital Gains Tax page.
3. Inheritance Tax: Preserving family wealth.
Inheritance Tax (IHT) can take a significant portion of the estate you leave behind, but marriage offers several ways to reduce or eliminate this tax, preserving wealth for your family.
What is Inheritance Tax?
Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. There's a threshold above which this tax applies, and it can take a considerable chunk out of the estate.
What is the spouse exemption?
Transfers of assets between spouses or civil partners are exempt from IHT. This means that when you leave your estate to your spouse, they won't have to pay any IHT, no matter the size of the estate.
What is the transferable nil-rate band?
If the deceased doesn't use all of their IHT-free allowance, the unused portion can be transferred to the surviving spouse. This can potentially double the IHT-free threshold for the surviving spouse's estate, allowing more wealth to be passed on tax-free.
As well as the standard nil-rate band, there is a residential nil-rate band although not everyone is entitled to this.
How to learn more.
For detailed information on current thresholds and exemptions, see the GOV.UK Inheritance Tax page.
4. Maximising pension contributions to take advantage of tax relief.
Pensions are a critical aspect of financial planning, and marriage can enhance the benefits you receive from your pension contributions, particularly when it comes to tax relief.
What is tax relief on pension contributions?
When you pay into a pension, you receive tax relief on your contributions. This means that a portion of the money you would have paid in tax is instead added to your pension pot by the government. The amount of relief you get depends on your income tax band.
What are non-working spouse contributions?
Even if one partner doesn't earn any income, they can still contribute to a pension and receive tax relief. This can be an important tool for ensuring that both partners build up sufficient retirement savings.
For example, a non-working spouse can contribute a certain amount annually to a pension, and the government will add a tax relief top-up. This ensures that even those not currently working save for retirement and benefit from the associated tax relief.
What are Pension Death benefits?
Many pension schemes allow the surviving spouse to inherit the deceased partner's pension benefits, providing a source of ongoing financial security. This should give you peace of mind, knowing that your spouse will be taken care of even after you're gone.
How to learn more.
Visit the GOV. UK Pension Tax Relief page for the latest information on pension contribution limits and tax relief available.
5. Tax credits and benefits: Maximising entitlements.
Marriage can also affect your eligibility for various tax credits and benefits, which can significantly impact your overall financial situation.
What is Child Tax Credit?
This is available to couples with dependent children. The amount you receive depends on your income, the number of children you have, and any specific circumstances, such as disabilities.
What is Working Tax Credit?
This is designed to supplement the earnings of those on low incomes. The amount is determined by your joint income and the number of hours you work.
What about the impact of Marriage Allowance?
While the Marriage Allowance can reduce the higher earner's tax bill, it's essential to consider how it might affect your eligibility for means-tested benefits like tax credits. A lower individual income could increase entitlement to certain benefits.
How to learn more.
Visit the GOV. UK Tax Credits page for the most up-to-date information on tax credits, including eligibility and how to apply.
6. Joint ownership of rental property: The tax advantages for married couples.
Owning rental property together as a married couple or civil partners can offer several tax advantages, particularly when it comes to Income Tax and Inheritance Tax.
Joint Tenancy vs Tenants in Common.
There are two main ways you can own property together. In a joint tenancy, both partners own the entire property equally. In a tenants-in-common arrangement, each partner owns a specific share of the property. This distinction can have different tax implications.
Income from rental property.
If you rent out a property that you own jointly, the rental income is usually split equally between both partners for tax purposes. However, if one partner is in a lower tax band, you may be able to allocate more of the income to that partner, reducing the overall tax paid on the rental income.
Inheritance Tax planning.
As joint owners, property can pass automatically to the surviving spouse upon death, normally without triggering Inheritance Tax. This can be a significant advantage, ensuring your properties remain within the family without a hefty tax burden.
How to learn more.
For more information on property ownership and the tax implications, refer to the GOV.UK Property and Rental Income page.
Conclusion.
Marriage can offer significant financial benefits, particularly in reducing your tax bill. You can make the most of your marital status by understanding and utilising allowances such as the Marriage Allowance, Capital Gains Tax exemptions, and Inheritance Tax planning strategies. These six opportunities provide a comprehensive roadmap to ensure you and your spouse are in the best position to take advantage of marriage's tax benefits.
For the most accurate and up-to-date information, always refer to the relevant pages on the GOV.UK website. If you'd like to explore how these benefits can impact your specific situation, consider booking an initial consultation with our team. We offer expert advice tailored to your needs, helping you make the most of your financial future.
What’s next?
If you need assistance with your personal finances, particularly in the context of Taxation, our advisers are here to help. You can get in touch with one of our advisors for independent financial advice and we offer a free initial consultation. Based in Royal Tunbridge Wells, we advise clients across the UK.
Don’t forget, this article offers general financial information and should not be taken as personal advice. Remember that investments and pensions can go up and down in value, so you could get back less than you put in. Tax rules can change and will depend on your individual circumstances.