How To Use Your Spouse's Allowances To Cut Your Household Tax Bill

If you’re in a couple, it may be that you manage your finances jointly. It often makes sense to do so.

But when it comes to tax, HMRC treats each person separately, with individuals having their own tax allowances and tax bands.

In this guide, we’ll show you how to legally make use of both your and your partner’s allowances, so that you can potentially reduce your household tax bill.

Please note that this guidance only applies to married couples and civil partners.

The exact tax allowances you’re entitled to will depend on your specific circumstances. However, a spouse or civil partner will typically have:

• A Personal Allowance (the amount you can earn before income tax is due
• A Personal Savings Allowance (the amount you can earn in interest on your savings before income tax is due)
• A Dividend Allowance (the amount of dividend income you can receive each year before paying dividend tax)
• Capital Gains Tax annual exempt amount (the amount of profit you can make each year from selling investments before Capital Gains Tax may apply)
• An ISA allowance (the maximum amount you can pay into ISAs each tax year while benefiting from their tax advantages)
• A pension annual allowance (the maximum amount that can usually be paid into your pension each tax year while receiving tax relief)

Where one person in a partnership isn’t using all of their allowances while the other has gone over theirs, there may be an opportunity to save tax.

Alex and Sam are married.

Alex owns a savings account that earns £2,000 of interest each year.

Because Alex is a higher-rate taxpayer, part of that interest may be taxable.

Sam, however, has little savings income and hasn’t used their Personal Savings Allowance.

If some of those savings were genuinely transferred into Sam’s name, more of the interest could potentially be received tax-free.

The same principle can apply to investments that pay dividends or assets that may be sold in the future.

This example is for illustrative purposes only.

In many cases, yes.

One of the biggest tax advantages of being married or in a civil partnership is that assets can often be transferred between spouses without triggering Capital Gains Tax.

This allows couples to rearrange ownership so both people can make use of their tax allowances.

However, the transfer needs to be genuine. The asset must actually become the other person’s, rather than simply being moved on paper while one person continues to control it.

Depending on your circumstances, you may be able to transfer:

• Shares
• Investment funds
• Cash savings
• Some property interests
• Other investments

The tax consequences can vary depending on the type of asset, so larger transfers may be worth discussing with a tax adviser.

Don’t forget your ISA allowances

Every UK adult has their own annual ISA allowance.

That means a married couple or civil partners can potentially shelter twice as much from tax by making use of both ISAs.

For example, if the annual ISA allowance is £20,000 per person, together you could invest up to £40,000 into ISAs during the tax year.

All income and growth that happens inside an ISA are free from Income

Tax and Capital Gains Tax – making it an obvious starting point for investors / savers.

When you sell investments outside an ISA or pension, you may have to pay

Capital Gains Tax on any profits.

Because each individual has their own annual Capital Gains Tax exempt amount, some couples use this feature to transfer investments between themselves before selling them. This can allow couples to double-up on their annual exemption rather than using just one allowance.

It won’t be suitable in every situation, and it has to be a genuine transfer, but it can help reduce the amount of tax you need to pay.

What about pensions?

Pensions can only be owned by the named pension saver, so you can’t transfer an existing pension to your spouse.

However, both spouses can build up their own pension savings and benefit from pension tax relief.

Pension tax relief is a government tax benefit that means some of the money you would have paid in Income Tax is added back onto your pension instead.

Boosting pension contributions for the lower-earning spouse can also be an effective way to build retirement savings as it ensures you are making full use of both individuals’ pension allowances.

Assuming you’re taxed as a couple

In the UK, spouses and civil partners are usually taxed as individuals. That means two separate sets of allowances.

If one person in the partnership has maxed out their allowance, and the other person is under the threshold, there’s a possibility that you could make tax savings by transferring assets.

Forgetting unused allowances

Are you aware of all the allowances you’re entitled to? Is your partner? Reviewing your finances together could shine a light on opportunities to save tax.

Only using one ISA

Each person has their own ISA allowance. Using both can protect more of your savings and investments from tax.

Making transfers after selling

If you’re planning to transfer investments between spouses, it’s often better to do so before selling them. Once an asset has been sold, it may be too late to benefit from both people’s Capital Gains Tax exemptions.

Personal Allowance: The amount of income you can earn before paying Income Tax.

Personal Savings Allowance: The amount of savings interest you can receive before paying tax, depending on your income tax band.

Dividend Allowance: The amount of dividend income you can receive before paying tax on it.

Capital Gains Tax (CGT): A tax you may pay on the profit you make when selling certain investments or assets.

ISA (Individual Savings Account): A tax-efficient account where any interest, dividends and investment growth are generally free from UK tax.