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Hundreds of thousands of women face shock tax bills due to frozen thresholds and rise in the state pension.
An estimated 750,000 couples of pension age share part of their personal allowance in order to pay less tax, claiming a break on income duties known as the “marriage allowance”.
But a freeze on tax thresholds and rise in the state pension could see many hit with shock tax bills next April as they will no longer be able to claim the tax break in full, a former pensions minister has warned.
The marriage allowance, introduced in 2015, allows a non-taxpayer to transfer £1,260 of their personal allowance to their spouse or civil partner. The exemption reduces the tax bill of the partner, who must be a basic-rate taxpayer, by up to £252 a year.
It is often the woman who is the lower-earner sharing part of their personal allowance with their husband.
However, in order to claim the tax break, their income must be beneath 90pc of the personal allowance – the amount a person can earn before they have to pay income tax – which is frozen at £12,570 until 2028 under current government plans.
On top of this, the new state pension is expected to rise by 8.5pc next year, in line with average earnings growth in the three months to July.
Under the Government’s “triple lock” commitment, the state pension rises annually by the highest of 2.5pc, average earnings growth or inflation based on September’s figures.
As a result it is expected that the state pension will hit £11,500 a year in April.
This could push many women’s incomes above the 90pc threshold (£11,310), meaning they incur tax bills on the amount by which they exceed the threshold.
The couples affected will have to decide whether to continue claiming the allowance and pay the tax bills, or forfeit the allowance, increasing the husband’s tax bill and potentially leaving the couple worse off overall.
Steve Webb, of pension consultancy LCP, warned that more than 100,000 women could face marriage allowance “mayhem” over the next few years.
He 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 allowances in order to reduce their husbands’ tax bills. But as the state pension rises many of these women may now find they end up with an unexpected tax bill.”
He added: “The sooner the freeze on tax allowances comes to an end, the better.”