Will sharing pension income reduce tax liability?
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Phil Beck is an Independent Financial Adviser with Smith & Pinching advising on state and personal pensions.
I am in my late sixties and am looking to retire in a year – I deferred my state pension for a few years as I wanted to carry on working. I also have a personal pension. My wife is already retired but has no personal pension, just a full state pension. I’ve been working out the figures of what we’ll need and I believe I should be able to achieve a total pension income of about £25,000 a year, including my state pension. This will mean that I will pay tax on my income: is there a way I can share my private pension income with my wife so that we can pay less tax between us?
Phil Beck of Smith & Pinching responds:
Your pension fund is personal to you, so I’m afraid you can’t just pass it on to your wife in your lifetime (unless you were to divorce). However, there is a way you may be able to save tax as a couple. This saving can only happen where one partner in a marriage or civil partnership is a basic rate taxpayer and the other is a non-taxpayer. In those circumstances, the non-taxpayer (i.e. your wife) can pass 10pc of her personal allowance (the amount she can earn before paying income tax) over to you – so £1,250 in the 2020/21 tax year – increasing your personal allowance and therefore reducing the amount of tax you pay.
This additional allowance is known as the Marriage Allowance and is not to be confused with the married couple’s allowance, which is an allowance only available to couples where one partner was born before 1935. Higher and additional rate taxpayers are not eligible to claim the Marriage Allowance.
In order to claim the Marriage Allowance, your wife (as the non-taxpayer) would need to apply to HM Revenue & Customs. It can be done online via the government website at www.gov.uk/apply-marriage-allowance or through your self-assessment tax return, if you complete one. Your revised personal allowances will be applied by adjusting your tax codes, and the change will be backdated to the start of the tax year.
You may also be able to backdate your wife’s claim for the Marriage Allowance to cover any tax years in which you were eligible since 5 April 2016, which may well result in a further reduction to your tax liability for the current year.
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The run-up to retirement is an important time for your financial planning: you will be facing some serious decisions about how to use your pension savings to fund your retirement income. I strongly recommend that you take independent advice at this critical stage so that you can understand your options and check that your plans are both tax-efficient and achievable.
Any opinions expressed in this article do not constitute advice. They assume the 2020/21 tax year and may be subject to change.
For more information visit smith-pinching.co.uk
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