When the Government increases the state pension in April by 10 per cent I will then start paying tax, as I currently give 10 per cent of my tax allowance to my husband who earns above the threshold.
Would it be cost effective to continue to do so, as if I stopped it I would still be below the threshold?
I have a state pension currently of £730 which is paid four-weekly giving an annual income of £9,490, and a small civil service pension of £115 per month totalling to £1,380 per year which equates to £10,870 overall.
Money dilemma: Should I stop giving my husband 10% of my tax allowance after the state pension rises in April?
This could ostensibly rise to nearly £12,000 (depending on any cost of living rise I may get from the civil service).
Although this would still be under the threshold for tax liability, if I continue to give my husband the 10 per cent I would then be liable for tax, albeit on only a small amount.
Can you advise the best way forward please? I am sure there will be others in my situation that would welcome advice on this dilemma.
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Steve Webb replies: A combination of frozen tax-free allowances and substantial inflation-linked increases in the state pension (and other pensions) means growing numbers of people may face the same dilemma as you.
Let me explain what is going on here and talk you through your options.
As you know, the standard personal allowance is £12,570 and this figure is going to be frozen at least until 2027/28.
This year your state pension plus civil service pension is comfortably below this, so you don’t pay income tax.
I see that you have taken up the ‘marriage allowance’ scheme which allows a non-taxpayer such as yourself to transfer an unused 10 per cent of your personal allowance to a spouse or civil partner who pays tax at the basic rate.
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This year you have given away £1,260 of your allowance to your husband, which helps to reduce his tax bill, potentially saving him 20 per cent of £1,260 or £252.
This leaves you able to receive £11,310 of tax-free income this year, and this is still above your pension income of £10,870. It therefore makes perfect sense to use this scheme.
Next year, as you say, things will be different.
The state pension is due to rise by 10.1 per cent in April, and I would assume your civil service pension will rise by the same amount.
Applying a 10.1 per cent increase to your total income gives you £11,968. This is below the standard tax free allowance of £12,570, but above the allowance you have left of £11,310 when you have transferred £1,260 to your husband.
At this point you will need to consider whether to continue with the marriage allowance or not.
In simple terms, as long as you have *any* gap between your total taxable income and the full £12,570 allowance, then you will benefit as a couple from carrying on with the transfer.
Although you will personally start to pay income tax for the first time, the amount you pay will be less than the amount your husband saves.
This is because your ‘spare’ personal allowance is being put to good use.
In short, using the marriage allowance process means that you will still be better off as a couple than if you had not done so, but your personal tax bill will go up.
If and when your total income goes above the £12,570 figure (which could well happen by 2027/28) then you would no longer be eligible to apply for the marriage allowance as you have to have income below the full personal allowance to do so.
Finally, you should note that the marriage allowance continues automatically unless you cancel it, or unless you have income above the full personal allowance.
In your situation this means that unless you specifically cancel the current arrangement, things will carry on as they are.
In 2023/24, you will start to pay a small amount of income tax, but your husband will continue to get the full benefit from your transferred allowance.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at email@example.com.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
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