More than two million couples claim marriage allowance, according to government figures, and about a third of them are retirees. These complex benefits also create a problem for hundreds of thousands of women who now earn more than the personal allowance due to increases in state pensions.
Non-taxpayers can only share £1,260 of their allowance if they earn less than 90% of the personal allowance. If the state pension rises by 8.5% next year, in line with inflation, many could see a modest increase in their income that would lead to unexpected tax bills.
Former Pensions Minister Steve Webb, of pensions consultancy LCP, said: “We could see the ‘chaos’ of marriage allowance as hundreds of thousands of couples have to decide whether to continue or scrap the arrangement, to avoid dragging low-income pensioners into… This arrangement. Net tax. The sooner we end the freeze on tax breaks, the better.”
Child support tax fee
Marginal tax rate: up to 79%
Sean McCann, of consultancy NFU Mutual, said one of the biggest traps is the “potential triple whammy” that could hit families once the top earner’s income exceeds £50,270.
“Not only do they start paying income tax at 40% on earnings above this level, if their partner is a non-taxpayer, they also lose the marriage allowance of up to £252 each tax year. In addition, Child support tax is charged to couples with children once the income of the highest earner exceeds £50,000.
The High Income Child Support Charge recovers child support from a family where one parent earns more than £50,000.
It was introduced by former Chancellor George Osborne in 2013 and has been heavily criticized ever since. This is partly because a dual-earner couple each earning £49,000 will not be affected by the tax charge – while a single-parent family earning more than £50,000 will lose some or all of their child benefit.
Child benefit for your first child is £1,248 per year and £827 for each subsequent child.
Once a parent exceeds the £50,000 threshold, child benefit is clawed back at the rate of 1 per cent for every £100 they earn until it is completely lost when their income exceeds £60,000. This creates very high marginal tax rates, which vary depending on how many children you have.
This means a person earning £55,000 with two children would lose £1,038 a year. The effective marginal tax rate will be 63%. For someone with four children, the rate would rise to 79%.