Households in the UK may increase their tax-free Personal Allowance to as much as £17,610 for a single tax year by utilizing a government scheme from HM Revenue and Customs (HMRC). This opportunity is available for couples who are married or in a civil partnership, allowing them to backdate claims for the previous three tax years.
As the deadline for self-assessment tax returns approaches at the end of January, individuals are encouraged to review their tax codes. The recent freeze of the tax-free Personal Allowance at £12,570 until 2031 means many will face higher tax liabilities due to what is known as “fiscal drag.” This situation arises as incomes rise in response to inflation, pushing more people into taxable income brackets that have not changed for a decade.
The Personal Allowance is the income threshold that must be exceeded before tax is applied. Currently, earnings above £12,570 are taxed at 20%, while higher earners face rates of 40% on income over £50,270 and 45% for those exceeding £125,000.
Unlocking the Marriage Allowance
Married couples or partners in civil partnerships can benefit from the Marriage Allowance, which allows one partner to transfer £1,260 of their Personal Allowance to the other. This transfer can reduce the tax burden by up to £252 per year. Eligible couples can backdate their claims to the 2021-2022 tax year, potentially obtaining a tax rebate of up to £1,260 over four years.
According to Gov.uk, the Marriage Allowance works as follows: if one partner earns below £12,570, they can transfer their unused Personal Allowance to the higher-earning partner. This transfer effectively raises their tax-free income threshold to £13,830, resulting in a tax saving of £252 annually.
Eligible couples could apply the Marriage Allowance claim for up to four years retroactively, significantly increasing their tax-free allowance. For example, if all backdated claims are applied in a single year, the total tax-free allowance could reach £17,610, offering substantial savings.
Eligibility Criteria and Changes for 2024-2025
To qualify for this scheme, one partner must earn less than £12,570, which may apply to those currently unemployed, on a career break, or taking care of children. The other partner should be a basic rate taxpayer, with earnings between £12,570 and £50,270, after pension contributions.
For the 2024-2025 tax year, a minor adjustment allows individuals earning between £11,130 and £12,570 to transfer their Personal Allowance. Although this change still provides a financial benefit, the savings are less significant compared to those earning below £11,130.
It is crucial for individuals to act promptly, as claims can only be backdated for the current year and the past four financial years, limiting eligibility for years prior to 2020-2021. By leveraging this scheme, couples can maximize their tax-free income and ensure they are not paying more tax than necessary.
