Should my spouse nonetheless give me 10% of her private tax allowance after she will get state pension? STEVE WEBB replies

Last year my wife transferred 10 per cent of her personal tax allowance to me as she is a non-taxpayer and I am a basic taxpayer.

However, this year she will start to receive her new state pension which is the maximum as she has 35 years of National Insurance contributions.

My wife has no other incomes streams so the new state pension is her only income.

Will her new state pension per annum be higher than her now reduced personal tax allowance, and if so how will HMRC recover tax from her?

Steve Webb replies: You are benefiting from something called the ‘marriage allowance’ which enables a non-taxpayer to transfer 10 per cent of their personal tax allowance to their spouse (or civil partner), provided that the spouse is a basic rate taxpayer.

More than two million married couples benefit from this scheme.

For many pensioner couples, this has been a welcome way of reducing their tax bill at no cost.

In your case, it is your wife who has the lower income. She has ‘spare’ tax allowance that she has not needed in the past.

Under the marriage allowance scheme, she can transfer 10 per cent to you, reducing your tax bill but with no impact on her.

The transfer can, of course, go the other way in cases where it is the husband who is the non-taxpayer.

To express this in pounds-and-pence, the current tax free allowance is £12,570, so it is possible to transfer £1,260 (just over 10 per cent) of unused allowance to a spouse.

As you are a basic rate taxpayer, you will save 20 per cent of this or £252 each year. Note that this is an all-or-nothing decision, so your wife cannot decide to transfer a different amount.

However, for growing numbers of pensioners things are not quite this simple.

The reason for this is that the rate of the state pension has been increasing quite significantly in recent years to keep pace with the rising cost of living, but the tax free allowance has been frozen.

For as long as the lower income spouse has an income under 90 per cent of the personal allowance there is not a problem. This because even 90 per cent of the personal allowance is enough to cover their taxable income.

However, as the graph below shows, this year the standard rate of the new state pension went just above the 90 per cent threshold and next year it will be well above.

The current standard pension figure is £221.20 per week or just over £11,500 per year, but someone who has transferred 10 per cent of their personal allowance will only have £11,310 left.

And from April 2025, the annual new state pension will be £11,973 – well above the £11,310 remaining personal allowance of someone who has transferred 10 per cent to their spouse.

As you have correctly worked out, if your wife continues to transfer 10 per cent of her allowance to you, she will now be a taxpayer.

And with more and more people now on the new state pension system, this situation will become increasingly common.

In terms of the practicalities of collecting the tax that will now be due, a lot depends on what other income the person has.

If they had an occupational or private pension, HMRC could use a tax code on that pension to collect any tax that was due. But you have told me that your wife has no other source of income.

In this case HMRC will use a process known as ‘simple assessment’.

At the end of the tax year they will look at your wife’s total taxable income (which will be reported to them directly by DWP), and assess how much tax she should have paid.

They will then issue a tax bill through the post and ask her to pay, usually by the following January.

Although no tax demand is welcome, the ‘simple assessment’ process does at least mean that your wife will not have to fill in a tax return or supply information to HMRC.

They already know everything that they need to know and will do the calculations for you.

A guide to the ‘Simple Assessment’ process specifically written for pensioners can be found here.

Your wife therefore now has two options.

One would be to cancel the ‘marriage allowance’ and go back to benefiting from a full personal tax allowance. As the new state pension is still less than 100 per cent of the tax allowance she would revert to being a non-taxpayer.

But your tax bill would rise by up to £252, as explained earlier.

Alternatively, your wife can take no action. In this case the marriage allowance continues automatically. You would continue to benefit from £252 off your tax bill, but your wife would get an end year tax demand of roughly £130.

You may, of course, decide that because you have benefited from the transfer of part of your wife’s tax allowance you will cover this tax bill.

If you did so, then your wife would not be out of pocket overall and you would still have a lower tax bill than if the transfer had never taken place.

It is worth adding that the freeze on allowances is due to run through 2026/27 and 2027/28.

Based on official forecasts of the likely increase in state pensions over those two years, it is highly likely that in 2027/28 the new state pension will exceed the full income tax personal allowance.

At this point you would cease to be eligible for the marriage allowance as you would both be taxpayers even before any potential transfer of allowances.