Tax-free Personal Allowance increase as HMRC sends out cheques | Personal Finance | Finance
A little-known rule to boost your tax-free Personal Allowance means you could be sent a cheque for £1,000 by HMRC.
The Personal Allowance has been frozen since 2021 at £12,570. That’s the amount you can earn without paying any tax on it, and every £1 earned beyond that threshold is usually taxed at 20%, or 40% or 45% depending on how much beyond the threshold you go.
And the threshold is set to be stuck in place for years longer, after the government announced it would extend the existing lock until 2031.
That’s why earners need to use the fully legal tax allowances available to them to maximise their tax free earnings, as inflation pushes more and more people into paying more tax beyond the frozen threshold, a concept known as ‘fiscal drag’.
One such allowance is the Marriage Tax Allowance, a handy perk for married couples (or those in civil partnerships). Not only does this allow you to claim money off your tax bill by raising your Personal Allowance in the current tax year, it also allows you to backdate the claim for up to four more years, which will result in a cheque from HMRC, or a bank transfer payment.
Speaking on the latest episode of The Martin Lewis Money Show Live, money mogul Martin explained that in order to benefit from this perk, you need to be married or in a civil partnership and one person needs to earn under the £12,570 threshold, while the other earns above it.
The lower earner then transfers some of their unused tax allowance to the higher earner.
Martin said: “So here’s how it works, it has to be a non-taxpayer, so that’s someone earning under the £12,570 a year Personal Allowance, the amount that you can earn each year tax-free, married to a basic rate 20% taxpayer.
“The non-taxpayer can go to gov.uk and apply to give 10% of their Personal Allowance to the taxpayer.
“So they now get both. Which means, the net effect is, the non-taxpayer now has £11,310 a year they can earn tax-free, which will hopefully cover most of what they do earn.”
He added: “The gain of that, this year, is £252 because [the spouse] has got £1,260 they’re not paying 20% tax on that they would have otherwise.”
Martin said that this can then be backclaimed for four more years, which will result in a cheque.
He added: “The times five, is crucial. Because with the Marriage Tax Allowance you can back claim four tax years, so you can get this tax year, which is done by altering your tax code, and you can go back four prior tax years, which is about £1,000 benefit, which you get as a cheque, or through BACS, assuming of course that you were eligible for it.”
