The stealth tax grab on state pensions facing 750,000 married women

Hundreds of thousands of women counting on their wedding tax deductions could be hit with a surprise bill next year.

As many as 750,000 retirement-age couples use the spousal allowance to reduce their tax bills by sharing part of their income tax deductions.

However, a combination of frozen tax thresholds and rising state pensions means that many couples could face unexpected demands from HM Revenue & Customs in April as they can no longer take full advantage of the tax break.

Former Pensions Minister Steve Webb, who is now a partner at actuary and consultancy firm Lane Clark & ​​Peacock (LCP), warns this could cause ‘chaos’ for those using their spousal allowance.

You can earn up to £12,570 before you have to pay tax, known as personal tax relief.

Couples where one spouse earns below this threshold can share their allowances under a tax benefit known as the spousal allowance.

If one partner earns at least 10 per cent less than the personal allowance – £11,310 – and the other is a basic taxpayer, the lower earner can give up 10 per cent of their unused tax allowance at no extra cost.

This shields more of the couple’s income from taxes.

Until now, anyone receiving the full state pension, currently £10,600 a year, could claim marriage benefit as long as they have no other income.

This is because their pension income was more than 10 percent below the personal deduction limit.

Those who take advantage of the marriage benefit can save up to £252. For example, if a retired woman is completely dependent on the state pension, she can give her husband an additional allowance of £1,260.

As a basic taxpayer he will no longer pay 20 per cent tax on this amount, saving £252 a year. Once the woman has signed up for this system, the transfer will continue every year until revoked by the couple.

It is usually the woman who has the lower income and therefore she shares her benefits with her husband, who must be a basic taxpayer.

But from April next year, a huge increase in the state pension will mean that many of the women who have relied on this tax break could now face tax bills as a result because their earnings will be too close to the benefit.

State pensions could rise by 8.5 percent next year under the government’s ‘triple lock’ after profit growth rose higher than expected over the summer, according to official data.

The triple lock guarantees that retirees’ incomes will rise at the highest rate of inflation, wage growth, or 2.5 percent every year.

If the triple lock is respected, pensioners on the full new state pension – paid to those who reached retirement age after 2016 – will get a boost of £902.20 next year, taking their annual income to £11,502.40.

However, to make full use of the allowance, your income must be less than £11,310.

This means that many women may become liable to pay taxes because they have transferred 10 percent of their benefit to their husband, who can benefit from it, but their state pension amounts to more than 90 percent of the benefit. They would be taxed on the amount by which they exceed the allowance.

For example, the new state pension could rise to £11,502.40. This is £192.40 on their remaining personal allowance.

They would therefore owe £38.50 in tax. Income tax exemptions typically rise in line with inflation, but the government has frozen them – including the personal allowance – until 2028 in a ‘stealth tax’ attack aimed at supporting the Treasury’s budget deficit.

Mr Webb said: ‘This is yet another unwelcome by-product of the annual freeze on the value of the tax exemption.

‘We could see chaos in the area of ​​spousal benefits as hundreds of thousands of couples have to decide whether to continue or cancel this scheme if they want to avoid low-income pensioners being dragged into the tax net. The sooner the freeze on tax exemptions ends, the better.”

Couples who find themselves in the tax net can either continue with the spousal allowance, leaving the wife with a small tax bill each year, or they can cancel the spousal allowance, increasing the husband’s tax bill and potentially leaving them worse off. general.

The problem will also affect non-retired couples, but many people of working age will have a stay-at-home partner who has little or no taxable income, so they don’t have to worry about this problem.

Those who earn part-time can continue to access the allowance as long as their income remains at least 10 per cent below the £12,570 threshold.

But for retirees, even the partner with a lower income can come relatively close to the tax limit due to the increase in the state pension.

The tax burden for retirees will increase across the board next year. More than half a million pensioners will be pushed over their personal allowance limit when the state pension rises next April. Any pensioner who receives more than £242 a week must pay tax.

Next Wednesday, Chancellor Jeremy Hunt will make his autumn statement and announce the rate at which the state pension will rise next year.

Officials warned last month that the government is looking at plans to limit the rise in the state pension so that recipients do not get the full 8.5 percent they expect.

They claim that the figures are artificially high and ‘distorted’ by one-off public sector bonuses and wage agreements.

j.beard@dailymail.co.uk