From the 2015/16 tax year, some spouses and civil partners will effectively be able to transfer part of their personal allowance to their partner.
Who can make a transfer?
Spouses and civil partners are only able to make a transfer of part of their personal allowance to their spouse or civil partner if they are not liable for income tax because their income is below their personal allowance, or if they pay income tax at the basic rate, dividend rate or the starting rate for savings. Spouses and civil partners who pay tax at the higher or additional rate are not eligible to make a transfer.
The ability to transfer part of the personal allowance is not available to couples who are entitled to the married couple’s allowance (available where at least one spouse or civil partner was born before 6 April 1935).
Conditions imposed on the recipient
To benefit from the effect of the transfer, the recipient must not be liable to tax at a rate other than the basic rate, dividend ordinary rate or the starting rate for savings.
This restriction prevents couples from saving tax by transferring allowances from a non-taxpayer or basic rate taxpayer to a spouse who pays tax at the higher or additional rate in order to get relief for the transferred allowance at 40% or 45%.
How much of the allowance can be transferred?
Couples eligible to make a transfer can transfer up to 10% of the basic personal allowance. As announced in the Autumn Statement on 3 December 2014, the basic personal allowance will be £10,600 (rather than £10,500, as previously announced). Consequently, the transferable amount of the personal allowance will be £1,060 (10% of £10,600). This amount is known as the transferable amount.
How does it all work?
The spouse or civil partner who wishes to make an allowance transfer can make an election to reduce his or her personal allowance by the transferable amount. The election must be made no later than four years after the end of the tax year to which it relates. This means that couples have until 5 April 2020 to make an election for 2015/16.
If the election is made before the end of the tax year to which it relates, it continues in force for subsequent tax years until it is withdrawn or ceases to have effect. However, if it is made after the end of the tax year to which it relates, it applies only for that year.
Effect is given to the transferred allowance by means on an income tax reduction. The reduction is equal to the basic rate of tax multiplied by the transferred amount. Therefore, for 2015/16 the reduction is £212 (£1,060 x 20%).
The personal allowance for the partner making the transfer is reduced by the transferable amount.
When is a transfer worthwhile?
Making the election is worthwhile where the transferable amount is better utilised in the hands of the recipient. The following examples illustrate situations in which this is the case.
Example 1: Wife with no income
Julie is a stay-at-home mum. She has no income. Her husband works in retail and pays tax at the basic rate.
By making the transfer, the couple save tax of £212 in 2015/16. Julie’s personal allowance is reduced by £1,060 to £9,540.
Example 2: Husband with dividend income only
Max has only dividend income and pays tax at the dividend ordinary rate. His wife Amy is a basic rate taxpayer.
As the personal allowance is effectively wasted when set against dividend income (as it is not possible to reclaim the 10% tax credit), the couple will be £212 better off in 2015/16 by making the election.
Example 3: Wife with savings income only
Janet has only savings income on which she pays tax at the savings rate of 10%. Her husband Brian is a basic rate taxpayer.
By making the election, relief for the transferable amount will be available at 20% rather than 10% and the couple will be £106 better off in 2015/16.
Practical Tip:
There is no need to rush into making an election. Couples can wait until after the end of the tax year when income is known, before deciding whether it is worthwhile.
