“Love and marriage, love and marriage. Go together like a horse and carriage”, or so Frank Sinatra crooned, back in the day. So little surprise that around 2 million people are expecting their loved one to pop the question this year on the most romantic of all days, Valentine’s.
However, while ‘Ol Blue Eyes’ himself clearly favoured a stable of horses and a variety of carriages, having married four times and had a string of glamorous lovers to boot, those who get hitched and stay that way can reap the rewards of matrimony. The fact is that marriage can be incredibly tax efficient. The following also applies to couples in civil partnerships.
When it comes to income tax
While we each have our own personal tax allowance, which allows us to earn a certain level of income before we have to start paying tax, married couples can utilise a nifty little thing called the Marriage Allowance to boost the proportion of their income that remains tax-free.
If you’re a basic rate taxpayer and your spouse is a non-taxpayer, or earns less than £11,500 in the current tax year, then they can transfer £1,150 of their tax-free allowance to you; saving you as much as £230 a year in income tax.
Take a look at HMRC’s Marriage Allowance calculator to work out how much you can save.
There is also something called the Married Couples Allowance, which is totally different and which applies if one of you was born before 6 April 1935. This enables you to reduce your tax bill by between £326 and £844.50 a year.
If you run your own business you can cut your tax bill by ‘sharing’ your earnings with your spouse. If you make them a fellow director or shareholder in the business - even if they don’t actually do anything for the money they receive - you can legitimately make the most effective use of your personal allowances and ensure more of your earnings fall into the non-taxpayer or at least basic taxpayer bands.
HMRC has clamped down on how much income you can take in the form of dividends, but by utilising your couple power you can make double use of what you get.
You each have a dividend allowance that you can use in much the same way as you can use your personal tax allowance to maximise the tax-efficiency of your earnings. You can take up to £5,000 in the 2017/2018 tax year and then £2,000 in the 2018/19 tax year in the form of dividends, before any tax is due.
When it comes to ISAs
Double the allowance means double the potential tax-efficient savings within your ISA. Now that we can each save £20,000 a year into an ISA, for couples it has become an even more valuable investment tool. And could effectively be seen as having the equivalent of a third annual pension allowance between you.
There is another important benefit with ISAs too and this is the ‘additional permitted subscription’ (APS). This allowance enables the surviving spouse to receive an APS equivalent to the amount held in the ISA at the time of death. This allowance is in addition to your own ISA allowance.
When it comes to pensions
If you and your partner reached state pension age before 6 April 2016, in some circumstances basic state pension entitlement can be passed on, either in part or in full, to the surviving spouse when the other spouse dies.
When it comes to property and other assets
While each of us can inherit up to £325,000 before inheritance tax (IHT) becomes payable, married couples benefit from two special clauses.
Not only can you leave assets such as property or savings to your spouse when you die without them becoming liable for IHT, spouses can combine their nil rate band and effectively pass on double the assets IHT-free.
When they both die, married couples can pass on an estate to their children, or other heirs, worth up to £650,000 without them having to pay IHT on the estate. And there is now also a separate residence nil rate band that provides a separate IHT threshold for property. It is currently worth £100,000 and due to rise to £175,000 from April 2020.
Combined, these inheritance tax breaks only available to married couples and those in civil partnerships, mean a married couples assets could be worth £1 million combined before IHT is due in the current tax year.
Now, who said there was nothing romantic about tax?
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. If you invest in an ISA or SIPP there is no capital gains tax on growth and no income tax on interest. The value of tax savings and eligibility to invest in an ISA or self-invested personal pension (SIPP) depend on personal circumstances. All tax rules may change in future. With pension products you will not be able to withdraw your money until you reach age 55. If you redeem ISA holdings, you cannot reuse that ISA allowance. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.