You may remember 1990 for the reunification of Germany or the creation of the first web server, but it’s also the year in which wives began to be taxed independently of their husbands in the UK.
The scrapping of an old-fashioned, sexist system was long overdue. And, in the 33 years since, many women have benefited from privacy around their tax affairs and income.
The big gainers from independent taxation were dual-earning couples who were liable to a higher rate tax when their incomes were aggregated but only the basic rate tax when taxed separately. Everyone benefited, though, because no matter your age or how long you’ve been in a relationship, it’s best to maintain some financial autonomy.
That’s why, while two out of three cohabiting couples have joint bank accounts, many couples choose to retain their own personal current accounts, from which they transfer some income each month into the joint account. It’s a good way to collaborate regarding the bills, while allowing each partner financial independence — and the all-important ability to build a so-called “fuck-off fund” as an escape route from a bad job or partner, or another negative situation.
However, a carefully planned joint approach to money beyond paying the bills can bring financial advantages to married and civil partnership couples, particularly where one spouse earns more than the other. Ladies, I’m looking at you here too — by 2019 women were out-earning their male partners in almost a quarter of households, according to research by Royal London. using data provided by the Office for National Statistics.
So the growing numbers of cohabiting couples could be losing out to the tune of thousands of pounds a year. New data from the 2021 Census has revealed that the proportion of adults who have never married or been in a civil partnership has increased every decade from 26.3 per cent in 1991 to 37.9 per cent in 2021.
Louise Higham, financial planning director at wealth manager Evelyn Partners, says cohabiting couples should recognise they are forgoing tax benefits and possibly financial security. “This is even more the case now than in recent years, thanks to many tax allowances being either slashed or frozen, as announced in Jeremy Hunt’s Autumn Statement.”
The time to act is now, especially as we approach the end of the tax year on April 5.
First, look at the marriage allowance, a perk of getting hitched if one of you is a non-taxpayer — earning below the personal allowance of £12,570 — and the other is a basic-rate taxpayer, earning between £12,570 and £50,270. It allows the non-taxpayer to transfer up to 10 per cent, £1,260, of their tax-free personal allowance to their higher-earning partner to save them £252 a year in tax. You can backdate eligible claims for four years up to April 6 2016, which could be worth up to £1,242 in tax relief.
Beyond this, couples in stable marriages, who absolutely trust their spouses, and are willing to be completely transparent about assets and income with each other, have more scope to reduce income tax, whatever their tax band.
“Money is often a taboo subject in relationships, and at times it can be hard to discuss it rationally,” says Alistair McQueen, head of savings and retirement at Aviva. But married couples who are transparent about income and assets can collaborate on efficient tax planning, bringing new meaning to “what’s mine is yours”. Instead, think, “what’s taxed as mine, can be taxed as yours”.
Higham says the key point is married couples and civil partners can transfer assets between themselves without triggering a tax liability. “This option is not available to unmarried couples, as movement of assets between cohabiting couples is a disposal for capital gains purposes and would negate the benefits of this exercise.”
Higher rate or additional rate taxpayers with taxable income-generating assets, such as rental property or a portfolio of shares, can reduce the combined income tax bill by transferring some or all of the assets to a lower-earning spouse. Then, some of the income is declared on their tax return, not yours.
Property transfers can be more complex because you may have to transfer the legal ownership so as not to fall foul of HM Revenue & Customs. Nevertheless, dropping property income from a higher rate to basic rate tax band on an average gross rental income of £7,891, according to specialist rental platform Ocasa, could save £1,578 a year.
Likewise, if you have a lot of cash in savings accounts, look at which partner should hold this. A non-taxpayer may get up to £5,000 of interest from savings (in addition to their personal allowance of £12,570) and not have to pay tax on it. Basic rate and higher rate taxpayers can only get £1,000 or £500 of interest respectively and not have to pay tax on it.
Also consider long-term investments. Try to get as much as possible into Isa wrappers because this will save on income tax and capital gains tax in the long run.
If you have a general investment account, in which income and capital gains on investments and shares are taxed, but haven’t thought about holding these investments in your spouse’s unused £20,000 Isa allowance, you’re missing a trick. And if you don’t use the additional allowance before April 5, you will have to wait until the next tax year to try again.
If an investment has increased in value and you still think it has good prospects, you could sell enough to realise £12,300 — the capital gains tax allowance for 2022-23 — and then buy the same investment in your spouse’s name within the tax-free wrapper of the Isa. The instant CGT saving on £12,300 at 20 per cent would be £2,460, plus any future growth on the asset is now protected, which makes sense in the light of planned CGT allowance cuts.
Where both Isa allowances are filled, a transfer of growth investments to a spouse can make sense in order to get another CGT allowance. And Higham points out: “Married couples can switch shares held outside Isas between each other to benefit from two sets of annual dividend allowances, which could be particularly beneficial as these are about to be halved in April so that only £1,000 of dividends per person can be received tax free.”
For the ultimate tax efficiencies, remember there are two annual £40,000 pension allowances to fill, with income tax relief — “free money” from the government — up for grabs. For a higher-rate taxpayer a £40,000 pension contribution could effectively cost as little as £24,000, making a saving of £16,000. But for a basic-rate taxpayer it could save £8,000.
Non-earners can contribute up to £3,600 each year — a payment of £2,880 to which the government automatically adds 20 per cent tax relief to the value of £720.
All these savings mean that if you’re ambivalent or indifferent on the subject of marriage or civil partnership you could quite sensibly be swayed by the fiscal advantages. But in discussing them, whether married or not, you might find other money topics open up.
Do you have different attitudes to investment risk? Do you both want to be Bank of Mum and Dad? Or do you want to prioritise an early retirement? You might not agree on these bigger issues by the end of the tax year, but I’d still set a firm deadline for resolution.
Moira O’Neill is a freelance money and investment writer. Twitter: @MoiraONeill, Instagram @MoiraOnMoney, email: moira.o’neill@ft.com
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