Women pensioners could face marriage allowance ‘mayhem’, warns former minister

As the state pension rises, some women could be faced with an unexpected tax bill, Sir Steve Webb said.

Pensioners could be hit by unexpected tax bills (Yui Mok/PA) (PA Archive)

Some women pensioners who have shared part of their income tax allowance with their spouse could face unexpected tax bills as a result of the frozen income tax allowance, a former pensions minister has warned.

The marriage allowance applies in cases where one person in a couple pays basic rate tax and the other is a non-taxpayer.

To benefit as a couple, the lower earner must normally have an income below the tax-free personal allowance – this is usually £12,570.

Former pensions minister Sir Steve Webb highlighted Government figures indicating that around 2.1 million couples benefited from the marriage allowance in 2020/21. He said just over one in three of these are estimated to be pensioner couples.

In many cases, the husband will be the taxpayer and the wife will have the lower income and be a non-taxpayer.

This is yet another unwelcome by-product of the year-on-year freeze in the value of the tax allowance

Sir Steve Webb, LCP

The non-taxpayer can transfer 10% of their personal allowance to their spouse.

Provided the non-taxpayer is more than 10% under the tax threshold, they remain not liable for tax.

The taxpayer in the couple benefits by saving on tax, which can potentially leave couples better off overall.

Sir Steve warned that big cash increases in the value of the state pension, coupled with a freezing of the tax threshold, could push more women who do not currently pay tax over the 90% threshold.

The tax could be collected via a tax demand in the post after the end of the financial year.

Sir Steve, who is now partner at consultants LCP (Lane Clark & Peacock), said: “This is yet another unwelcome by-product of the year-on-year freeze in the value of the tax allowance.

“Hundreds of thousands of women have signed over part of their tax-free allowance in order to reduce their husband’s tax bill.

“But as the state pension rises many of these women may now find they end up with an unexpected tax bill. 

“We could see marriage allowance ‘mayhem’ as hundreds of thousands of couples have to decide whether to carry on with this arrangement or cancel it, to avoid low income pensioners being dragged into the tax net. The sooner the freeze on tax allowances comes to an end, the better.”

A Treasury spokesperson said: “Pensioners whose sole income is the new state pension and who have not deferred or receive protected payments do not pay any income tax, and this year we provided the biggest ever cash increase to pension payments, a 10.1% rise.

“Our tax burden remains lower than any major European economy – and by raising personal thresholds over the past decade we have taken three million people out of paying tax altogether. The best tax cut we can provide right now is to halve inflation, which we’re on track to do this year as long as we stick to our plan.”