4 ways that marriage can reduce your tax bill

Marriage can bring many changes, one of which is the potential to save on your tax bill. When you and your spouse or civil partner tie the knot, there are several financial benefits that you can take advantage of. Getting married can reduce your capital gains tax, inheritance tax, and income tax while also ensuring your pension continues after you die.

One of the key ways this works is through the Marriage Allowance. This lets non-taxpayers transfer a portion of their unused Personal Allowance to their spouse. This can save eligible couples up to £252 annually and can even result in a lump-sum payment if backdated for previous years.

Another advantage is the ability to transfer assets between spouses without incurring capital gains tax. Additionally, married couples and civil partners can benefit from reduced inheritance tax rates, further supporting your financial well-being.

Key Takeaways

• Marriage can lower various taxes such as income, capital gains, and inheritance tax.
• The Marriage Allowance allows transfer of unused allowances between spouses.
• Financial benefits include tax savings and pension continuation.

Understanding the Marriage Allowance

Marriage Allowance can be a useful way to reduce your income tax as a couple. If one partner is a lower earner, they can transfer part of their unused Personal Allowance to the other partner, potentially saving money.

Eligibility Criteria for Marriage Allowance

To qualify for Marriage Allowance, you need to be married or in a civil partnership. Just living together doesn’t count. One partner must be a non-taxpayer, meaning their income is less than £12,570. The other partner needs to be a basic-rate taxpayer.

Both individuals must be born on or after 6 April 1935. The transferring partner can move up to £1,260 of their unused Personal Allowance to their partner. This reduces the higher-earner’s tax by up to £252 annually. You should ensure your tax codes are updated as this affects how HMRC calculates your income tax.

Applying for Marriage Allowance

You can apply for Marriage Allowance through the HMRC website. The application process is straightforward. You’ll need both your details and your partner’s National Insurance numbers and proof of identity.

Once you’ve applied, HMRC will alter your tax code and that of your partner. The lower earner’s tax code will end in ‘N’ and the higher earner’s in ‘M’.

It’s also possible to backdate claims for up to four years, potentially receiving a larger tax refund. If your circumstances change, like a divorce, remember to update your details with HMRC to avoid complications.

Transferring Unused Tax Allowances

Transferring unused tax allowances between spouses or civil partners can significantly reduce your tax bill. This process is straightforward and can provide meaningful financial benefits, especially if one partner earns significantly less than the other.

Benefits of Transferring Allowances

When you transfer a portion of your personal allowance to your higher-earning spouse, it can lower their tax liability. This means that up to £1,260 of your personal allowance can be passed on, resulting in up to £252 of tax savings per tax year.

Only one partner needs to be a non-taxpayer for this to apply, which generally means earning less than the £12,570 personal allowance. This allowance reduces the taxable income of the higher-earning spouse, pushing more income into lower tax brackets.

Not only does this cut your tax bill, but it helps manage your finances better by ensuring your overall tax payment is reduced. Adding this allowance transfer to other tax benefits can provide substantial yearly savings.

How to Transfer Allowances

To transfer allowances, you need to officially apply through HMRC. If eligible, you can do this via the Marriage Allowance page on the GOV.UK website. Here, the low-earning partner needs to apply and provide details about both spouses or civil partners.

You can backdate your claim for up to four previous tax years if eligible, thus receiving any owed refunds. This can add up to a significant amount.

For PAYE taxpayers, HMRC adjusts the tax code, reflecting the change in tax allowances. For those who do self-assessment tax returns, include the transferred allowance on your yearly tax return. Ensure all information is accurately reported to avoid penalties and issues with your tax records.

Maximising Pension Contributions

Maximising pension contributions can provide significant tax benefits. By contributing more to your pension, you can benefit from tax relief and ensure financial security for non-working spouses.

Tax Relief on Pension Contributions

When you pay into a pension, you receive tax relief on your contributions. As a basic-rate taxpayer in the UK, you can get a 20% boost from the government. For example, if you contribute £80, it will be topped up to £100. Higher and additional rate taxpayers can claim extra tax relief through their tax return.

Different rates apply in Scotland. Intermediate rate taxpayers receive 21%. Remember, contributing to your pension can move you into a lower tax band. This can reduce the tax you owe on other income, such as from your estate.

Pension Contributions for Non-Working Spouses

Non-working spouses can still benefit from pension contributions. Even if they don’t earn any income, they can receive contributions from their working spouse. They can get tax relief on contributions up to £2,880 per year. This amount will be increased to £3,600 by the government.

This approach is beneficial for household financial planning. Ensuring both partners have pension savings can reduce dependency on the state pension and increase overall financial security. It also means that the surviving spouse has a secure income in retirement.

This method can offer substantial long-term tax benefits. Take advantage of these rules to protect your future.

Capital Gains Tax Advantages

Getting married can have several capital gains tax (CGT) benefits. These advantages primarily revolve around sharing assets between spouses and employing strategies to reduce the taxable gains on joint properties.

Sharing Assets and CGT Implications

When you are married, you can transfer assets to your spouse without triggering capital gains tax. This means you can evenly spread out the ownership of assets between you and your partner.

This is particularly useful for investment properties and shares. If one partner is in a lower tax bracket, transferring assets to that partner can reduce the overall tax liability when those assets are eventually sold.

By strategically sharing assets, you essentially increase the tax-free allowances available to your household. This not only helps in reducing your tax bill but also ensures better financial planning for long-term goals.

Strategies to Minimise Capital Gains Tax

You can employ several strategies to minimise your capital gains tax liability. One effective method is to make use of both spouses’ annual capital gains tax exemptions, which is £12,300 each in the current tax year.

By spreading the sale of assets over multiple tax years, you can benefit from these exemptions. Another strategy involves careful timing of asset sales to align with periods of lower income, thus reducing the overall taxable gain.

Utilising tax-efficient accounts like ISAs for assets that are likely to appreciate can also help minimise CGT. By leveraging these various approaches, you not only manage your family’s finances more effectively but also ensure substantial tax savings.

Inheritance Tax Benefits and Spousal Exemptions

Marriage can offer valuable benefits regarding inheritance tax. One significant advantage is the spouse exemption, which can reduce the tax burden when passing on property to a surviving spouse.

Understanding Spouse Exemption for Inheritance Tax

When you pass away, your estate may be liable for inheritance tax. However, transfers between spouses or civil partners are usually exempt. This means you can leave all your assets to your spouse without triggering inheritance tax.

For instance, if your estate is valued at £500,000, you can transfer this entire amount to your spouse without any inheritance tax. This exemption helps preserve family wealth and ensures that the surviving spouse can maintain their financial stability.

Passing on Property to a Surviving Spouse

One significant inheritance tax benefit is the ability to pass on property to a surviving spouse. Normally, there is a tax-free threshold of £325,000, with 40% tax on amounts above this limit. Yet, anything left to your spouse is exempt.

Additionally, you can boost this threshold when passing on your home. If you leave your property to your children or grandchildren, your estate can benefit from an increased threshold of up to £500,000. This is particularly important for larger estates, as it can significantly reduce the tax burden.

In the case of unused allowances, the surviving spouse can inherit the unused portion. For example, if a husband leaves £100,000 to others, the remaining £225,000 of his threshold can be added to his wife’s tax-free allowance, totalling £550,000.

Utilising Tax Credits and Benefits

Getting married or entering a civil partnership can provide you with significant advantages when it comes to tax credits and benefits. These advantages can help reduce your overall tax bill and ensure you make the most of your financial situation.

Child and Working Tax Credit Benefits

When you’re married or in a civil partnership, you may be eligible for child tax credits and working tax credits. These credits are designed to support families with the cost of raising children and to provide financial assistance to those with low earnings.

Child tax credits offer support based on the number of children you have, their ages, and any disabilities they might have. Working tax credits help those with a low income by supplementing their earnings.

To claim child and working tax credits, you and your partner must be working a required number of hours per week. The amount you receive depends on your joint income and circumstances. This can significantly lower your tax liability, especially if one partner is a basic-rate taxpayer and the other is a low earner.

Additional Benefits for Married Couples and Civil Partnerships

Being married or in a civil partnership also allows you to benefit from the Marriage Allowance. This benefit lets a low earner transfer up to 10% of their personal allowance to their spouse or civil partner.

To qualify, one partner must earn less than the personal allowance (typically £12,570 for the 2023-24 tax year), while the other must be a basic-rate taxpayer. This can save couples up to £252 a year in taxes.

Additionally, married couples born before 6 April 1935 may be eligible for the Married Couple’s Allowance. This can reduce their tax bill by an amount between £364 and £941.50 annually, making it a valuable benefit for older couples.

Seeking Professional Financial Advice

Seeking professional financial advice can help you make informed decisions about your tax liability.

Financial advisors can provide guidance on how marriage can affect your income tax. This includes eligibility for benefits like the Married Couple’s Allowance if you or your spouse were born before 6 April 1935.

For self-employed individuals, professional advice can be invaluable. Advisors can help you navigate complex tax regulations and ensure you take advantage of all available allowances and deductions.

It’s wise to speak to a tax advisor who can tailor their advice to your specific financial situation. They can help identify ways to optimise your tax savings, particularly if you’re the highest earner in your household.

If you’re unsure where to start, consider reaching out to the income tax helpline, which can provide basic guidance and direct you to professional services if needed.

Always make sure your chosen advisor is reputable and qualified. Look for financial advisors who are certified by recognised associations. This ensures they have the necessary expertise to help manage your tax affairs effectively.

Frequently Asked Questions

When it comes to reducing your tax bill through marriage, there are several key queries couples often have. These questions cover how to apply for allowances, differences between tax reliefs, taxation choices, and potential impacts on other benefits.

What steps should couples take to apply for the Marriage Allowance?

To apply for the Marriage Allowance, one spouse needs to transfer part of their Personal Allowance to the higher-earning spouse. Visit the GOV.UK website to complete the application online. You’ll need both your National Insurance numbers and a form of ID.

How does the Married Couple’s Allowance differ from the Marriage Allowance?

The Married Couple’s Allowance is available to couples where at least one partner was born before 6 April 1935. This allowance can reduce your tax bill more significantly than the Marriage Allowance, which is intended for younger couples.

Can married couples in the UK choose to be taxed separately, and if so, how?

Yes, married couples in the UK can choose to be taxed separately. This can be beneficial if one partner is in a higher tax band. This can be done by notifying HMRC that you wish to be taxed as individuals.

What are the potential impacts on other benefits for married couples opting for Marriage Allowance?

Opting for Marriage Allowance may impact benefits like tax credits or Universal Credit. The transfer of the Personal Allowance might affect your individual incomes, so it’s essential to check how it will influence any means-tested benefits you’re receiving.

How can married couples in Scotland take advantage of tax benefits?

Married couples in Scotland can still benefit from the Marriage Allowance. However, they should also be aware of the differences in Scottish tax bands when calculating potential savings. Visit the Scottish Government’s website for more details.

In what circumstances can the Marriage Allowance be cancelled, and what is the process?

The Marriage Allowance can be cancelled if your circumstances change, such as a change in income or separation. To cancel, you must contact HMRC and provide information about the change in your situation. This ensures that both partners’ tax codes are updated appropriately.

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