HMRC is failing to provide comprehensive guidance to taxpayers on the new Transferable Tax Allowance. Basically, its guidance does not speak to those who earn more than their tax-free allowances but may nevertheless benefit.
When I first queried the new TTA with HMRC 12 months ago, it was clear they were “clear” (or at least reasonably lucid) on principles but fuzzy on implementation. HMRC envisaged that the process would be driven by the transferor / elector, although this would be largely unfamiliar territory for Self-Assessing taxpayer claimants. The legislation itself refers to “entitled individuals” and (understandably) does not go into the specifics of how that entitlement is converted into cold hard tax relief for that beneficiary, who is uninvolved with the election process. Thanks to the Child Benefit Clawback (HICBC) we now know that the subversion of independent taxation is not, perhaps, the unfamiliar territory it arguably should be.
Past Offences Not Taken into Consideration
I can forgive HMRC for the impracticality of the implementation of HICBC, since this was foisted on them by politicians who either didn’t understand the ramifications or didn’t care. (I suspect both. As an aside, we now have the promise of an investigation into Deeds of Variation, which will do nothing other than yield the painfully obvious conclusion that they are necessary for non-tax as well as tax reasons. But why listen to any competent solicitor’s advice when you can spend taxpayers’ money to score political points..?)
We also know that there are serious concerns in the implementation of HICBC (just as there have been for years with Tax Credits) as regards whether an unmarried couple is “living together” although I suggest that is what you get when you draft such legislation as to tax the “wrong mans”, part of the outcome of an unfortunate coupling of benefits and tax concepts... Thankfully, the TTA legislation specifies only that the couple be legally married / civil partners, (ITA 2007 s 55B (2)(a) as introduced by FA 2014), the quality of “living together” is largely moot. Perhaps you can teach an old dog new tricks.
The Bar is Too Low!
This time, however, I think HMRC is absolutely to blame, by suggesting that only those whose incomes fall below the personal allowance should make the election, at Register Your Interest in Marriage Allowance
“If your income is £10,600 or less in the 2015 to 2016 tax year, you may be able to reduce your husband, wife or civil partner’s tax by up to £212.”
This is misleading, unless you are not tax-resident in the UK. One might, here, make light of the fact that this guidance appears to be made out exclusively with “non-doms”, etc., in mind, were it not to miss the mark for many ordinary UK taxpayers. (Although they are, after all, a largely captive audience).
The legislation actually says that a UK resident may elect to transfer part of his or her Personal Allowance provided he or she is not a 40% or 45% taxpayer (ITA 2007 s 55C(1)(c)) and it simply cannot be beyond HMRC’s ken to realise that it is wrong to imply that only people whose incomes are below the Personal Allowance should make the election.
I know this because I discussed it with HMRC at some length a year ago. We discussed that a person’s income could exceed his or her Personal Allowance and he could still elect to transfer; (and might be better off by so doing); we also discussed that the couple could be worse off by reason of the election but HMRC was of the opinion that it was statistically unlikely.
How many more taxpayers will be paying less than the basic rate of tax, such that their tax bill will rise by less than their basic-rate-taxpaying spouse would fall, if the TTA were transferred? What of savings income, or dividend income in particular, which has an automatic credit sufficient to the Higher Rate Threshold?
Perhaps HMRC would argue that such issues are addressed in the “Before you Start” section further down their page:
“Before you Start
You’ll be able to claim Marriage Allowance if all the following apply:
- you’re married or in a civil partnership [fair enough]
- your annual income is £10,600 or less, plus up to £5,000 of tax-free savings interest [er, nope – e.g., dividends, UK-sourced Chargeable Event Gains]
- your partner’s annual income is between £10,601 and £42,385” [er, nope #2 – standard definition of basic rate applies, therefore subject to pension / gift aid contributions]
I assume that when it says “claim”, HMRC actually means “elect to transfer” because from the beneficiary’s perspective the advice is meaningless. That being said, HMRC is still wrong to be so restrictive but might say that it is beneficial only in those expanded circumstances which it sets out at the bottom of its advice. And yet this late admission addresses only savings interest, and nowhere does it mention dividends, etc.; it also compounds inaccuracy by suggesting that the election can be made only where the spouse’s income does not exceed £42,385. What about the spouse’s pension or gift aid contributions? Again, the fundamental requirement is that the beneficiary not be a 40%/45% taxpayer (ITA 2007 s 55B (2)(b)).
Has it not occurred to HMRC, the government’s avowed champions of ‘nudge theory’ and behavioural analysis, that most people will simply not read to the bottom of a page whose opening gambit effectively assures them they needn’t bother? Perhaps HMRC would simply prefer that only people with spare tax-free Allowances be incentivised to use the new regime, and is happy to ignore other potential beneficiaries.
If this were the only instance of half-baked advice in relation to the new Transferable Tax Allowance, then it could perhaps be forgiven as an oversight - albeit an oversight which taints the main source of information about the TTA for the general public. But it is in fact a common theme – see for instance Registration for New Married Couples['] Tax Break:
“The Allowance means a spouse or civil partner who doesn’t pay tax – therefore is not earning at all or is earning below the basic rate threshold (£10,600) – can transfer up to £1,060 of their personal tax-free allowance to a spouse or civil partner – as long as the recipient of the transfer doesn’t pay more than the basic rate of income tax.”
Notably, both David Cameron and George Osborne lent their voices to that press release. “Our new Marriage Allowance means saving £212 on your tax bill couldn’t be simpler or more straightforward”, said the man who gave us the Child Benefit Clawback. I should concur that the legislation seems quite simple but alas, implementation is a different matter.
Who Calls the Tune?
There is a ‘trickle-down’ effect in play here too. In a recent newspaper article Marriage Tax Allowance: How to Register:
“Married couples and civil partners where one person earns less than the personal allowance will be allowed to transfer up to £1,060 of their unused allowance to their partner, reducing their tax bill. The receiving partner must be a basic rate taxpayer, ear[n]ing no more than £42,385.”
Misleading, as we have already established. The next bits, however, are totally wrong:
“Not all partners will receive the full £212. If one person earns £10,000, they will only be allowed to transfer £600 of their allowance to their spouse. This would result in a tax break of £120 – 20pc tax relief on £600.” [No, the Transferable Amount is £1,060 in 2015/16 and is not attenuated – ITA 2007 s 55B (6) as fixed by (4). The election itself may be cancelled, e.g., by one party’s being a Higher-Rate taxpayer but the quantum is constant.]
“Couples where the lowest earner brings in more than the personal allowance will also miss out because only unused allowances can be transferred.” [Again, not accurate: use them, abuse them; just don’t go into the 40% band]
I don’t blame the newspaper: it smells too much like shooting the messenger. But whence came the message?
In the next article, we shall be looking at the election process itself. I am afraid the news does not improve.