Marriage is a significant life event that not only changes your relationship status but also has a substantial impact on your finances. One of the most overlooked aspects of tying the knot is how it affects your tax liability. In the UK, the tax implications of marriage are often misunderstood or ignored, leading to missed opportunities for tax savings. This article aims to shed light on how getting married can affect your tax liability in the UK in 2023.
The Basics: Personal Allowance and Marriage Allowance
In the UK, every individual has a tax-free Personal Allowance, which is the amount of income you can earn before you start paying income tax. For the tax year 2023-24, this allowance is set at £12,570. When you get married or enter into a civil partnership, you become eligible for what is known as the Marriage Allowance. This allows one partner to transfer up to £1,260 of their Personal Allowance to the other, provided neither of them is a higher-rate taxpayer. This transfer can reduce the higher-earning partner's tax by up to £252 in the tax year.
Eligibility Criteria for Marriage Allowance
To qualify for the Marriage Allowance, you must meet the following conditions:
You must be married or in a civil partnership.
One partner should earn less than their Personal Allowance, typically less than £12,570 for the 2023-24 tax year.
The other partner should be a basic-rate taxpayer, meaning their income should be between £12,571 and £50,270 before receiving the Marriage Allowance.
How to Apply for Marriage Allowance
Applying for the Marriage Allowance is straightforward. You can apply online through the HMRC website, and all you need are your National Insurance numbers and identification. Alternatively, you can also apply by calling the HMRC helpline at 0300 200 3300. Once approved, the tax code of the partner receiving the Marriage Allowance will change to 'M,' and the one who transferred their Personal Allowance will have their tax code changed to 'N.'
Marriage Allowance for Previous Years
If you've been eligible for the Marriage Allowance in previous years but haven't claimed it, you can backdate your claim for up to four years. This is particularly useful for couples who were unaware of this allowance and missed out on potential tax savings.
Married Couple’s Allowance: An Alternative
For those born before April 6, 1935, there's another allowance called the Married Couple's Allowance. This allowance could reduce your tax bill by between £364 and £941.50 a year. The tax relief for this allowance is set at 10%. However, it's worth noting that this allowance is gradually being phased out and is only applicable to those who meet the age criteria.
Capital Gains Tax and Spousal Transfers
One of the most advantageous aspects of being married in the eyes of the UK tax system is the ability to transfer assets between spouses without incurring Capital Gains Tax (CGT). This means if one spouse owns an asset that has increased in value, they can transfer it to the other spouse who may have a lower tax rate, thereby reducing the overall CGT liability. This strategy is particularly useful for assets like property or shares that have appreciated significantly over time.
Inheritance Tax Benefits
Inheritance Tax (IHT) is another area where married couples can benefit. In the UK, there is an unlimited spousal exemption for IHT, meaning any assets passed to a spouse or civil partner upon death are exempt from this tax. Additionally, the unused portion of the IHT allowance from the first spouse to die can be transferred to the surviving spouse, effectively doubling the IHT threshold for the couple.
Income Shifting for Business Owners
If you or your spouse owns a business, income shifting can be a highly effective way to minimize tax liability. By allocating income or dividends between the two of you, it's possible to make full use of both partners' Personal Allowances and basic rate tax bands. However, it's crucial to ensure that these allocations are justifiable and reflect each spouse's involvement in the business to avoid falling foul of anti-avoidance rules.
Utilizing Tax-Free Savings
Both partners in a marriage have their own individual ISA (Individual Savings Account) allowance. For the 2023-24 tax year, this is £20,000 per person. By effectively using both allowances, a couple can shelter up to £40,000 from tax. This is particularly beneficial for couples where one partner has a higher income and is looking for tax-efficient ways to save or invest.
Joint Ownership of Property
Owning property jointly can also offer tax benefits. By owning your home as 'tenants in common,' you can each leave your share of the property to anyone you choose, offering greater flexibility in estate planning. This can be particularly useful for couples with children from previous relationships.
Pension Contributions
Pension contributions are another area where strategic planning can result in significant tax savings. Contributions to your pension are tax-free up to certain limits. If one spouse is not using their full allowance, the other can contribute to their pension, thereby reducing their taxable income.
Child Benefit Charge
If you or your partner earns over £50,000, you may be liable for the High Income Child Benefit Charge, which effectively claws back some or all of the Child Benefit you receive. However, through careful income allocation, you may be able to keep your income below this threshold and retain the full Child Benefit.
The Pitfalls: Beware of the Marriage Tax Trap
While there are numerous tax benefits to getting married, it's essential to be aware of potential pitfalls. One such issue is the so-called "marriage tax trap," where the lower-earning spouse's income pushes the higher-earning spouse into a higher tax bracket. This can happen if the higher-earning spouse is close to the threshold for higher-rate tax and the lower-earning spouse transfers some of their Personal Allowance to them.
Student Loan Repayments
If you or your spouse has a student loan, getting married could affect your repayments. Student loan repayments are income-based, and if your combined income pushes you into a higher bracket, your repayments could increase. It's essential to factor this into your financial planning.
Tax Credits and Benefits
Certain tax credits and benefits, such as Working Tax Credit or Universal Credit, are calculated based on household income. If you get married, your combined income could affect your eligibility for these credits and benefits. Make sure to update your status with the relevant authorities to ensure you're receiving the correct amount.
Divorce and Separation
While no one enters into marriage expecting it to end, it's crucial to understand the tax implications of divorce or separation. Assets divided upon divorce could be subject to Capital Gains Tax, and spousal maintenance payments are not tax-deductible for the payer. Additionally, you'll need to inform HMRC of your change in circumstances to ensure your tax code is updated.
Tax Planning and Professional Advice
Given the complexities involved in tax planning for married couples, it may be beneficial to seek professional advice. Tax laws and allowances are subject to change, and a personal tax advisor can provide the most current and personalized guidance. They can help you optimize your tax situation, taking into account all available allowances, reliefs, and potential pitfalls.
How Do I Inform HMRC About Changes In My Marital Status?
Informing HMRC (Her Majesty's Revenue and Customs) about a change in your marital status is crucial for accurate tax calculations. Here are the steps you can take to update HMRC:
Online
Sign in to your Personal Tax Account: If you don't have one, you'll need to create it. You'll need your National Insurance number and a recent payslip or P60 form to verify your identity.
Update Your Details: Once logged in, look for the section where you can update your personal information. Here, you can change your marital status.
Submit the Changes: After updating, submit the form. HMRC will update your records and inform you if this change affects your tax code.
By Phone
Prepare Your Information: Have your National Insurance number and other identification details ready.
Call HMRC: The contact number for individual tax inquiries is 0300 200 3300.
Follow Instructions: The customer service representative will guide you through the process of updating your marital status.
By Post
Download or Request Form: Download the relevant form from the HMRC website or request it by mail.
Fill in the Details: Complete the form with your updated marital status and other required information.
Mail the Form: Send the completed form to the address provided on the form or on the HMRC website.
Through Your Employer
Inform Your Employer: Some changes, like a name change due to marriage, can be communicated through your employer, who will then inform HMRC through the PAYE system.
Special Cases
Civil Partnerships: The process is the same as for marriage.
Separation or Divorce: You must inform HMRC to ensure that any Marriage Allowance is stopped and your tax code is updated.
It's important to inform HMRC as soon as possible to ensure that you're paying the correct amount of tax and receiving any allowances or benefits you're entitled to. Failure to do so could result in incorrect tax calculations and potential penalties.
FAQS
Q1: Can I claim Marriage Allowance if my spouse has passed away?
A: Yes, you can backdate the Marriage Allowance claim to include any tax year since 5 April 2016 that you were eligible for Marriage Allowance. This means if your spouse has passed away recently, you can still claim the allowance for the years you were eligible.
Q2: What happens to my tax code after applying for Marriage Allowance?
A: The tax code for the person receiving the Marriage Allowance will change to 'M,' and the one who transferred their Personal Allowance will have their tax code changed to 'N.'
Q3: Can I claim both Marriage Allowance and Married Couple's Allowance?
A: No, you cannot claim both allowances at the same time. You have to choose one based on your eligibility criteria.
Q4: How does getting married affect my Self Assessment tax return?
A: If you are self-employed and get married, you still have to file your Self Assessment tax return individually. However, you may be eligible for Marriage Allowance, which could affect the amount of tax you owe.
Q5: Are civil partnerships treated the same as marriages for tax purposes?
A: Yes, civil partnerships and marriages are treated the same for tax purposes in the UK. The same allowances and benefits apply.
Q6: How does marriage affect my tax liability if I'm a non-resident in the UK?
A: If you're a non-resident but your spouse is a UK resident, you may still be able to claim Marriage Allowance. However, the rules can be complex, and it's advisable to consult a tax advisor for your specific situation.
Q7: Can I change my mind after applying for Marriage Allowance?
A: Yes, you can cancel your Marriage Allowance claim if your circumstances change. You'll need to inform HMRC to revert the changes to your tax code.
Q8: How does getting married affect my eligibility for Child Tax Credit?
A: Child Tax Credit is calculated based on your household income, which will include your spouse's income once you are married. This could affect your eligibility or the amount you receive.
Q9: What are the tax implications if I marry a non-UK citizen?
A: Marrying a non-UK citizen could complicate your tax situation, especially if your spouse has income from outside the UK. You may still be eligible for Marriage Allowance, but it's best to consult a tax advisor for personalized guidance.
Q10: How does remarriage affect my tax allowances and benefits?
A: If you remarry, your tax allowances and benefits could change. For example, if you were receiving Married Couple's Allowance based on your previous marriage, you would need to reapply based on your new marriage. Your eligibility for other allowances and benefits may also change.
These FAQs aim to address some of the most common questions people have about how marriage affects tax liability in the UK in 2023. For more specific advice tailored to your situation, it's always best to consult a tax advisor.
Conclusion
Marriage brings about significant changes in your life, including your financial and tax situation. While there are several tax advantages to being married, it's crucial to be aware of the potential downsides and plan accordingly. By understanding the various tax allowances, benefits, and pitfalls, you can make informed decisions that optimize your financial well-being.
Understanding the tax implications of marriage can help you make the most of the allowances and benefits available to you. In the next part, we will delve deeper into the financial planning aspects of marriage, including capital gains tax and inheritance tax considerations.
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