The personal allowance
The personal allowance is set for each tax year; for 2015‒16, the basic personal allowance (available to all UK resident individuals born on or after 6 April 1948) is £10,600 (for 2014‒15, the basic personal allowance was £10,000). Taxpayers earning £100,000 have a reduced personal allowance, and taxpayers in the higher income bracket may lose the personal allowance altogether (over £120,000 in 2014‒15 and over £121,200 in 2015‒16).
Transfer of personal allowance
From 6 April 2015, 10% of the personal allowance is transferable between spouses and civil partners. The transfer of personal allowance must be claimed on-line, and the option to transfer is only available to couples where neither partner is a higher rate taxpayer. There is also married couples allowance if one partner was born before 6 April 1935.
For PAYE taxpayers the personal allowance is spread throughout the year; and for the self-employed, the personal allowance is accounted for in their self-assessment tax return when the tax bill for the year is worked out.
How it works
One individual in a marriage or civil partnership earning less than £10,600, and not using up all their personal allowance can transfer £1,060 to their spouse or civil partner, so that the higher earner can earn £1,060 more before they start paying income tax. The tax authorities will increase the £1,060 limit automatically in line with the personal allowance.
Ros earns £5,000 and her partner earns £20,000; Ros transfers £1,060 of her unused allowance to her higher earning civil partner. This means her higher earning partner benefits from an additional £1,060 tax-free, so at 20% relief they will pay £212 less tax over the year.
Fair to all?
Not all couples will receive the full £212; e.g. if one person earns £10,000, they will only be allowed to transfer £600 of their personal allowance to their spouse/civil partner. This would result in a tax break of £120, 20% tax relief on £600.
Couples, where one is a basic rate taxpayer (earns below £42,385 in 2015/16) and one has unused personal allowance, do stand to benefit. Therefore, if your partner earns below £9,540 it makes good sense to transfer part of your personal allowance.
The scheme would benefit couples with children in particular, e.g. if one parent is looking after the children, not in paid work, or working part time, then this uses up some “wasted” personal allowance and leaves the family finances potentially £212 better off.
Who loses out?
Couples where one person earns over the basic-rate threshold are exempt, regardless of what their partner earns; couples where the lowest earner brings in more than the personal allowance will also miss out, because only unused allowances can be transferred. Cohabiting couples, unmarried / not in a civil partnership, will miss out, regardless of how long they have been together.
You can transfer £1,060 of your individual personal allowance if your spouse or civil partner earns:
- Less than £10,600
- You earn between £10,601 and £42,385
- You were born on or after 6 April 1935.
If your partner/spouse earns below the personal allowance threshold it makes very good sense for them to transfer part of their personal allowance. A gain of £212 a year may not seem a great deal on the scale of things, but every penny counts. The married couples allowance is also worth considering if one partner was born before 6 April 1935.
If you intend claiming for transfer of personal allowance, then do so now. Talk to your accountant/account manger and s/he will talk you through the process, or go to HMRC and claim online today.