Households in the UK can increase their tax-free Personal Allowance to £17,610 in a single tax year by utilizing a scheme offered by HM Revenue and Customs (HMRC) that allows for backdating. This applies to married couples and those in civil partnerships, enabling them to legally enhance their tax savings. With the self-assessment tax deadline approaching at the end of January, it is crucial for individuals to review their tax codes and identify potential savings.
The standard Personal Allowance remains fixed at £12,570 until at least 2031, following its freeze in 2021. This prolonged stagnation, referred to as “fiscal drag,” is expected to result in more individuals paying higher taxes as wages rise in response to inflation. As earnings surpass the frozen threshold, more taxpayers will fall into income tax brackets that remain unchanged.
The Personal Allowance defines the amount individuals can earn before incurring tax. Earnings above this threshold are taxed at 20%, with higher earners facing rates of 40% on income over £50,270, and 45% on income exceeding £125,000.
Married couples and civil partners have the opportunity to boost their tax-free income through the Marriage Allowance. This scheme allows one partner to transfer £1,260 of their Personal Allowance to the other partner, reducing their tax bill by up to £252 for each year claimed, which spans from 6 April to 5 April of the following year. According to the UK government website, “You can backdate your claim to 6 April 2021 for any years you were eligible for Marriage Allowance.”
Once a claim is approved, HMRC adjusts the tax code, resulting in a total tax-free income of £13,830 instead of the standard £12,570. This adjustment means a potential annual tax saving of £252. Over four tax years, individuals could receive a tax rebate of up to £1,260, or a total of £5,040 in additional tax allowance, translating to a £1,260 boost in pocket money, which is 20% of the total extra allowance.
To qualify for the Marriage Allowance, one partner must not pay income tax, typically earning less than £12,570. This situation may apply to individuals who are unemployed, on a career break, or caring for children. The other partner must be a basic rate taxpayer, with earnings between £12,570 and £50,270 after deducting pension contributions.
For the tax year 2024-25, a slight adjustment permits individuals earning between £11,130 and £12,570 to transfer their Personal Allowance. Although these earnings are still taxed, the scheme remains beneficial, albeit to a lesser degree than for those earning below £11,130.
Claims for the Marriage Allowance can be backdated for the current tax year and the previous four financial years, allowing for tax savings from 2021-2022 onwards. However, claims cannot extend to the 2020-21 tax year.
With the ongoing freeze of the Personal Allowance, now is an opportune moment for eligible couples to explore this tax-saving option. By taking advantage of the Marriage Allowance, taxpayers can secure significant savings that can enhance their financial well-being in challenging economic times.
