Make sure you claim what's rightfully yours

Question: I am married, was born before April 6, 1935 and do not use all of my married couple’s tax allowance. I file an annual tax return online and ask for the unused part of my married couple’s allowance to be passed on to my wife. She has a part-time job and pays some PAYE; I don’t earn enough to pay any tax at all.

HMRC comply with my wishes, except that they insist that only half of what is passed over is allowed to be offset against my wife’s income. So, although I passed across £7,296 last year, they said they would only allow half – i.e. £3,648. Their reasoning appears to be that, now that the minimum tax band is 20%, they have to treat the married couple’s tax allowance (which is 10%) as if it were 20%, thereby effectively reducing it by half.

I cannot follow this reasoning at all. When the lowest tax band was 10% they allowed it all, so why the change now? Surely it should still be the same allowance, irrespective of the amount of tax a person pays?

My second query is that, as I do a small job twice a year as an invigilator for the national exams at our local college, I receive a few hundred pounds twice a year, in June and February. I have been issued with a tax code for this work, but HMRC insist that the actual tax allowance is divided into twelfths and allocated on a monthly basis. Therefore, as the allowance is only worth about £60 per month (£720 for the full year), in June, when I have earned about two-thirds of the annual amount (say, £480), the tax allowance is only for April, May and June – one quarter of the full year’s allowance. I am therefore taxed on £480 – £180 = £300, at 20%.

Although it all works out at the end of the year, and I effectively get a tax rebate in February, it seems wrong that I am “lending” the taxman £6 for up to eight months. Surely a tax allowance should be applied as a whole-year sum? I cannot find anything written down anywhere to say it can be divided up.

Answer: You are misunderstanding how the married couple’s allowance is calculated:

The married couple’s allowance is different from all the other personal allowances. It is not added on to your other allowances, as the age-related allowance is, giving you a higher threshold. It is given as a reduction to the tax bill. The maximum reduction for 2012–2013 is £770.50 from any tax due. For the 2011–12 tax year, the figure was £729.50.

The website of the charity TaxAid explains how you work out the sums thus:

The married couples allowance for 2012/13 is £7,705, but relief is only available at a rate of 10%. Therefore, the maximum reduction to your tax as a result of receiving the allowance is £770.50.

If you are a basic rate taxpayer, paying tax at 20%, and are simply given an additional allowance of £7,705 on your code, you will receive a reduction of tax equal to £1,541, being double that which you should. Therefore a basic rate taxpayer would ordinarily receive an adjustment to their tax code of half the married couple’s allowance, being £3,852. For many pensioners this will be the correct PAYE adjustment and will give the correct tax deduction.

Problems arise for those who are not basic rate taxpayers. TaxAid goes on:

The snag is that it isn’t possible to include a deduction of tax of £770.50 in a PAYE code: mathematics won’t allow it. Instead, the tax deduction must first be converted into an amount of tax-free income. The problem is, what tax rate should be used to make the conversion? Some pensioners will pay tax at only the 10% starting rate for savings on up to the first £2,710 of their savings income.. This is because they have relatively low pensions and some savings income…….

It continues:

With a tax rate of 10%, the married couple’s allowance would be equivalent to the £770.50 tax saving ÷ 10% = £7,705 of additional tax free income. (In reality, it is not possible for the married couple’s allowance to giver an additional £7,705 of income at 10%. This is because a maximum of £2,710 of savings income can be taxed at 10%.)

With a tax rate of 20%, the married couple’s allowance would be equivalent to the £770.50 tax saving ÷ 20% = £3,852.50 of additional tax free income.
 
The figure would have been £3647.50 using last year’s figures (rounded up to £3,648) – the amount you got.

You say you “don’t earn enough to pay tax” but don’t say what you receive in pensions – either state or occupational – which are, of course, taxable. HMRC seems to be assuming you are a basic rate taxpayer.

Complicated? Yes it is, and if you can’t get your head round it you’ll have to take their word for it. The rules on the Married Couple's Allowance are among the most baffling in the tax book and ripe for reform.

I’m afraid, on the second point – having the taxman owe you money for several months of the year – that’s the way it works for everyone where PAYE is involved. In short, the system doesn’t recognise that you won’t earn any more during the year and you have to claim back any overpayment of tax at the end of the year. 

The same thing happens to younger workers who stop working or lose their job in the middle of a tax year. You say you complete a tax return, which is as well and should ensure you get all your allowance. Otherwise you would be still due your allowance on the months between February and the beginning of the next tax year in April. Anyone who does not complete a tax return and finds themselves in this position should claim a tax refund.
 
HMRC is moving over to a “Real Time Information” system of reporting by employers, which may help you get your refund more speedily.

I do recommend the TaxAid website if you are baffled by tax matters as it often describes how various tax aspects work better than the HMRC site.

TaxAid is a charity that assists people on low incomes with their tax affairs and helps them to understand the bits of the tax system that apply to them, to pay the right amount of tax and give them a helping hand in sorting things out when things go wrong.

Another source of tax help for people on low incomes in Tax Help for Older People. If you still think you aren’t paying the right amount of tax it would be worth contacting either of these organisation and asking if someone can do the sums for you.

* Read Annie Shaw's money articles every month in Saga Magazine.