State pension warning as hundreds of thousands at risk of unexpected tax bill

Pensioners who have handed part of their tax-free personal allowance to their spouse are at risk of an unexpected tax bill, a former pensions minister warned.

Sir Steve Webb said hundreds of thousands of pensioners, mostly women, who benefit from marriage allowance could be affected.

The tax break allows one member of a married couple to transfer 10 per cent of their personal allowance to the other.

But Sir Steve said a combination of state pension hikes and personal allowance freezes means a growing number of pensioners who have shared part of their tax-free allowance will be dragged over the 90 per cent 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 in the UK benefit from marriage allowance, with about one in three pensioners.

It is available to couples where one is a basic rate taxpayer and the other is a non-taxpayer.

One half of the couple can sign over 10 per cent of their personal allowance – which is currently £12,570 – to their partner.

The partner will not have to pay 20 per cent tax on £1,260, a total saving of £252 per year.

In the majority of cases, the husband is the taxpayer and the wife is the non-taxpayer.

Until now, many pensioner women could hand over 10 per cent of their personal allowance to their husband as their taxable income was below 90 per cent of the threshold.

But under the triple lock, the full state pension is due to go up by 8.5 per cent next April to £11,500 per year.

However, £11,500 is more than 90 per cent of the tax-free personal allowance.

Pensioners who are pushed over the threshold are set to receive a tax bill if they do not cancel the marriage allowance.

It comes as Chancellor Jeremy Hunt is facing pressure to honour the triple lock in full in his autumn statement next week.