I’m being charged tax on my pension – can I use marriage allowance to cut the bill?

In our weekly series, readers can email any questions about their finances to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot and has worked in financial services for 25 years. If you have a question for her, email us at money@theipaper.com Question: My wife and I have our state pension paid into our joint account each month. I receive £288.50 per week and my wife receives £136.50. Our only other income is £114 per week. I have a tax demand for £359 due on my £14,364 pension. Could we pass my wife’s marriage allowance of £1,200 to me to reduce the amount of tax due? Answer: When you are living largely on pension income, a £359 tax bill is not insignificant, so I can understand why you want to know whether there is anything you can do to bring it down. The encouraging news is that there may be a way to reduce it. Although the arithmetic looks right on the income figure you have given, that is only part of the picture. I would also want to check that HM Revenue & Customs (HMRC) has used the right income and taken account of any tax relief you can claim. Let us start with how HMRC arrived at £359. The standard Personal Allowance, the amount you can receive before paying income tax, is £12,570. Taking that away from your £14,364 taxable pension income leaves £1,794. Taxing this at 20 per cent gives £358.80. So, before any other reliefs or adjustments, the figures do add up.It can come as an unwelcome surprise that the state pension is taxable, even though no tax is deducted before it reaches your account. If HMRC cannot collect what you owe through another pension or employment income, it may send a Simple Assessment bill instead. You are right to query how your weekly state pension of £288.50 fits with the £14,364 annual figure. The two will not necessarily match: the bill covers a particular tax year, and your weekly pension may have changed since then. HMRC uses the pension you were entitled to during that year, not simply today’s payment multiplied by 52. I would also check the name of the separate benefit paying you about £114 a week. If it is Attendance Allowance, it is tax-free, so it should not be included in your taxable income or use up your Personal Allowance. Your award letter should help identify it, as the payment amount alone cannot tell us for certain. Now to the part that could make a useful difference: your wife’s not fully used Personal Allowance. Her state pension of £136.50 a week works out at roughly £7,100 over 52 weeks. If that is her only taxable income, she is comfortably below the standard £12,570 allowance. We would need to include any other taxable income before confirming her position. Marriage Allowance allows an eligible lower-income spouse or civil partner to transfer £1,260 of their Personal Allowance to their partner, reducing the recipient’s tax by up to £252 a year. Being pensioners does not, in itself, rule you out. It is your income and circumstances for the tax year in question that determine whether you qualify. Generally, the person transferring the allowance has income below their Personal Allowance, while their partner pays basic-rate income tax. Different qualifying tax bands apply in Scotland. From what you have told me, this is certainly worth exploring. I would just want HMRC to confirm your full tax position before you count on the saving. If you qualify for the full £252 reduction, your £358.80 bill would come down to £106.80, or around £107. That would leave a little more money in your pocket. You cannot transfer all of your wife’s unused allowance, but even this limited relief could take a sizeable chunk out of the bill. You might understandably wonder whether that would leave your wife paying tax instead. Her allowance would fall to £11,310 after the transfer. If her only taxable income is the roughly £7,100 pension you mention, she would still be below it. On those figures, the transfer should not create a tax bill for her. As for being told your wife cannot apply because she has no bank account of her own, I would go back to HMRC and ask for a clearer explanation. Qualifying for the allowance and completing the identity checks are separate issues. It is worth finding out exactly where the difficulty lies rather than leaving it there. For an online application, Gov.uk says you need both partners’ National Insurance numbers and may need to verify your identity. Have those numbers and your income details to hand when you contact HMRC. If your wife qualifies, ask them to explain how she can complete the claim in her circumstances. Unfortunately, this is likely to become a more familiar frustration as pensions rise while the £12,570 Personal Allowance stays frozen, leaving more of each increase exposed to tax. The new Pension Tax Allowance, due from April 2027, will offer some protection to pensioners on lower incomes. But it will be fully withdrawn at an annual income of £13,319 in its first year. On the figures you have given, your pension is already above that limit, while your wife’s is below the existing tax-free allowance, so sadly neither of you is likely to gain from it. So, while the £359 bill appears to add up, I would not stop there. Check the pension figure, make sure any tax-free benefit has been left out, and ask about the relief available to you as a couple. You have good reason to ask these questions, as getting the right answer could make a welcome difference to your household budget.