State pension increases combined with the personal allowance being frozen at £12,570 means a growing number of pensioners are nearing the tax threshold, and those claiming Marriage Allowance – typically women - at risk of being hit.
Steve Webb, partner at 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”.
The Marriage Allowance lets a non-taxpayer transfer 10 per cent of their personal allowance to their civil partner or spouse if they’re a basic rate taxpayer.
Around 2.1 million couples benefited from the tax break, worth up to £252 per year in tax saving to the couple, in 2020/21, with just over one in three of those estimated to be pensioner couples.
Former pensions minister Steve Webb estimates around 750,000 pensioner couples are using the Marriage Allowance, with thousands of them likely to be in this position.
People who claim Marriage Allowance would remain a non-taxpayer provided they remain more than 10 per cent under the tax threshold (typically £11,310).
However, substantial increases to the state pension – which increased by 10.1 per cent in April and is expected to rise by 8.5 per cent next year – mean pensioners are edging closer to the threshold.
The full new state pension is currently around £10,600 per year and will be £11,500 next year if it rises in line with average earnings under the triple lock.
With £11,500 taking up more than 90 per cent of the full personal allowance, people who have claimed Marriage Allowance and don’t actively cancel it will start getting tax bills.