Important information - The value of investments can go down as well as up, so you may not get back the amount you originally invest. Tax treatment depends on personal circumstances and all tax rules may change. You can't normally access money in a SIPP until 55.
It is not every day that government advisers give relationship advice. But then, during these testing times, we have quickly learned to expect the unexpected. There is no way to tell how many couples will take up the suggestion of England's Deputy chief medical officer to "test their strength of feeling" by self-isolating together, but looking at it strictly from a financial perspective, if it all works out, it could prove to be sound advice.
That is because, if you do “make a choice and stick with it”, as per the advice from Dr Jenny Harries and Health Secretary Matt Hancock, and wedding bells ring once lockdown is over, as you’ll see, 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 £12,500 in the current tax year, then they can transfer £1,250 of their tax-free allowance to you; saving you as much as £250 a year in the current 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 could enable you to reduce your tax bill by between £351 and £907.50 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 as an individual. You don’t even need to be married to do this one.
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 £2,000 in the current tax year in the form of dividends, before any tax is due. Take any more as a dividend and you will pay tax at 7.5% if you’re a basic-rate taxpayer and 32.5% if you’re a higher-rate taxpayer.
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 - again you don’t have to be married to take advantage of this one - 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, strictly for married couples, 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 have already reached state pension age since 6 April 2016, or are yet to, the surviving spouse or civil partner will be able to inherit 50% of any protected payment that exists.
That’s a change from the old rules that ran up to April 2016, which in some circumstances enabled basic state pension entitlement to be passed on, either in part or in full, to the surviving spouse.
It’s a change for the worse, but transitional arrangements are in place, so in some circumstances, people who have made national insurance contributions or have credits under the current system will still be able to inherit state pension from a late spouse or partner. Members of a couple in which only one of them reaches their State Pension age under the previous system may be able to increase their State Pension using their partner's National Insurance record. They can also inherit some additional State Pension from their deceased spouse or civil partner as under the present system. But there is no inheritance by a surviving spouse or civil partner of the extra state pension built up from deferral of a new State Pension.
When it comes to property and other assets
While each of us can leave loved ones up to £325,000 before inheritance tax (IHT) becomes payable, plus the new 'main residence' band of £175,000, giving a total allowance of £500,000, married couples benefit in two additional ways.
Firstly, any assets you leave your spouse or registered civil partner, of any amount - provided they're living in the UK - are exempt from inheritance tax. And secondly, when they too die, their inheritance tax allowance rises by the proportion of your allowance that you didn't use, giving you the combined opportunity to leave £1,000,000 to loved ones, tax-free.
So there you go, survive #loveinlockdown and decades from now, you’ll not only have a great story to tell your grandchildren, but you could very well boost your own finances - and theirs too.
Important Information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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