Two-thirds of married couples EXCLUDED from Tories’ marriage tax allowance

Fresh from capitulating to his backbenchers over Europe, David Cameron is having to give in again on the issue of the marriage tax allowance. Evan Harris has already spoken out against the Tories’ plans here on LDV this week, highlighting how the policy harks back to the 1950s’ concept of nuclear households with (male) ‘breadwinners’ and (female) ‘stay-at-home’ spouses.

In the lead-up to the 2010 election, the IFS also looked hard at the policy, producing a devastating indictment of the policy’s flaws.

First, it sets out how it works: ‘up to £750 of the income tax personal allowance [will be] transferable between adults who are married or in a civil partnership, so long as the higher-income member of the couple is a basic-rate taxpayer.’

Who would benefit from the marriage tax allowance?

A minority of married couples. In fact, as at 2010, 8.3 million of 12.3 million married companies will be EXCLUDED from the policy, including 6.2 million married couples with someone at work. Just 29% of non-pensioner married couples benefit at a cost to the taxpayer of £550 million a year.

Who doesn’t benefit from the marriage tax allowance?

An overwhelming majority of married couples.

Three sorts of married couples will not benefit from this policy:
• First, those couples where both adults each have an income greater than £6,555 and where there is therefore no unused allowance to transfer.
• Second, those couples where one adult has an income below £6,555, but their spouse pays income tax at the 40% rate or higher.
• Third, those couples where both have an income below £6,555, because such families would pay no tax in the absence of the policy and so neither partner can benefit from a higher tax allowance.

What does it do for work incentives?

To be fair, it helps the first potential earner in married couples, as long as they’re a basic-rate taxpayer. BUT it ‘reduces the incentive to work at all for some actual or potential second earners in married couples’ (especially those whose spouse’s income is less than £43,955, and whose own income in work would exceed £5,805).

Will it encourage marriage?

the extent to which marriage decisions respond to financial incentives is not known with any confidence; many couples would not benefit from the policy even if they were married; and the incentives to marry (or not to divorce) provided by a policy whose maximum benefit is £150 a year must surely be weak relative to the other costs and benefits involved.

Will it help the children of married couples?

A bigger question is why any government would want to encourage more couples to get married, or provide greater support to married couples than unmarried ones. Research by the Centre for Social Justice shows that children born to parents who are married do better on a wide range of outcomes than children born to cohabiting couples (and indeed to lone parents), but it is not clear that this relationship between marriage and better child outcomes is a causal one. …

If encouraging marriage is seen as desirable primarily for the impact that it has on child development, it is not clear that a policy where pensioner families make up more than a third of the beneficiaries and receive 31% of the gains is well targeted. In fact, only 35% of the families who gain from the policy have children, and only 17% have children under 5.

Does it make the tax system simpler to understand?

The most striking feature of the policy is that it significantly complicates the income tax system, introducing new marginal rate bands into already increasingly byzantine tax schedules. … The policy represents yet another use of a tapered personal allowance, which is a complicated, confusing and untransparent way of simply increasing an individual’s marginal income tax rate over a small band of income.

So there you have it… the Tories’ much-vaunted marriage tax allowance will actively discourage both parents from working, do next-to-nothing to encourage marriage, be irrelevant to two-thirds of married couples, benefit only 1-in-6 married parents with young children, and complicate the tax system further. Full steam ahead!

(* Declaration of personal interest: I’ve been living with my partner for more than 5 years. I don’t think a £150 hand-out from the taxpayer is likely to change that state of affairs.)

* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.

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  • Ian Eiloart 3rd Jul '13 - 11:07am

    So, this report is outdated. The personal allowance is now £9,440, and is likely rise to £10,000 shortly (a Lib Dem should never miss an opportunity to say that). That should mean that rather more second earners now have an allowance to transfer. On the other hand, fewer primary earners will benefit, because more of them will already have been taken out of tax.

    Nevertheless, there are probably much better ways of using this money, without further complicating the tax system: like increasing the NI threshold, for example.

  • Peter Davies 3rd Jul '13 - 11:12am

    “the Tories’ much-vaunted marriage tax allowance will actively discourage both parents from working” is absolutely not what the report says. Where both partners are unemployed it will encourage both to work. Once one has a job, the other has a disincentive to work but this will affect fewer people by less and their situation is less desperate than those in completely jobless households.

    The moralising is obnoxious. The implementation is ridiculously complex and the amount pathetic. You don’t need extra spin to attack this proposal. What you do need is a genuinely liberal alternative that addresses discrimination against single-earner couples (married or not) in the interaction of the tax and benefit systems and the disincentives this causes.

  • Thanks firstly to Stephen for looking at the details of the proposals and also to Ian for raising the point that some of the figures in the IFS report need to be revised to reflect the state of play in 2015 when this policy is likely to be implemented. However, since no further details have been released since the 2010 IFS paper, Stephen is right to use the 2010 data and to extrapolate from this.

    I believe the details of this policy are telling and provide more ammunition to sink it than all the arguments that those who shout about how unfair it is, use. As the IFS report clearly shows not only will the policy only target a minority, but the complexity will also mean that many will not bother applying. To me the complexity seems like the government is trying to apply a strait jacket to the allowance that isn’t too dissimilar to that applied to tax credits, which begs the question why not just increase working tax credits by £150 pa.

    The incentive for work is an interesting point, which deserves further investigation. The issue seems to be that where there has been a transfer of allowance, two new income thresholds come into effect. The first is the lower earner (earning zero up to £5,805 pa) and the second for the higher earner (earning up to £42,455 pa).

    With respect to the lower earner, there is no change real disincentive, they can increase their earnings with no impact on the overall joint income, albeit that tax reporting gets a little more complicated when earnings are between £5,805 and £6,555. Hence a disincentive here is the extra effort needed on their tax affairs, although a second disincentive may arise from the higher earning partner who has been retaining the allowance…

    With respect to the higher earner, things are slightly different as effectively due to the tapered removal of the allowance, they will have a marginal tax band of 30% for income between £42,455 and £43,955. Given that many at this level will be wary of becoming a higher rate tax payer, with all that that entails, this could be the straw that encourages someone to hold back as it would be more remunerative for their partner to go out to work…

    So I suggest the disincentives and incentives aren’t as stark and different to how they are today.

    As for an incentive to get married – well to get the allowance you will need to be married (or in a civil partnership) and to be married you will at least need to pay the Registry Office out of monies you already possess.

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