Sir Steve Webb said hundreds of thousands of pensioners, mostly women, who benefit from marriage allowance could be affected. The tax break allows one-half of a married couple to transfer 10% of their personal allowance to the other.
But Sir Steve warns a combination of state pension hikes and personal allowance freezes means a growing number of pensioners who shared part of their tax-free allowance will be dragged over the 90% threshold.
The partner at consultants LCP 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.” More than two million couples benefit from marriage allowance –about one in three pensioners.
It is available to couples where one is a basic rate taxpayer and the other a non-taxpayer. One half of the couple can sign over 10% of their personal allowance, which is currently £12,570, to their partner. The partner will not have to pay 20% tax on £1,260, a total saving of £252 per year.
In most cases, the husband is the taxpayer. Until now, many women could hand over 10% of their personal allowance to their husband as their taxable income was below 90% of the threshold. But under the triple lock, the full state pension is due to go up by 8.5% next April to £11,500 per year – which is more than 90%.
As Chancellor Jeremy Hunt faces pressure to honour the triple lock in next week’s Autumn Statement, pensioners pushed over the threshold are set to receive a tax bill if they do not cancel the marriage allowance.
