How couples can make good use of both spouses’ tax allowances

Most of us pay tax. But most of us can also earn some income or make some investment returns or gains tax-free.

That’s because we can make use of our tax allowances. For example, UK workers can usually earn £12,570 of income each year (the ‘personal allowance’) without paying tax. And HMRC also offers tax allowances for pensions, savings accounts and investment returns.

But the government has frozen several tax allowances and income tax thresholds in recent years. It has even reduced some tax allowances, sometimes substantially.

The government, by reducing or freezing tax allowances and tax thresholds, can increase tax revenues without officially raising tax rates. Inflation and wages have risen in recent years, but tax allowances and tax thresholds haven’t risen along with them. The government has consequently garnered a higher tax take while we have generally paid a higher proportion of our overall income and gains in taxes.

Since the government may continue to freeze many tax allowances and thresholds until at least 2028, you may want to take advantage of the allowances that still exist. One way to do so is to share them with your spouse or civil partner.

You and your partner could gain some real combined financial benefits if you make effective use of each other’s tax allowances and tax thresholds. But you both also need to decide whether this approach is right for you from a personal point of view.

For example, marriage allowance enables a tax-paying spouse to gain up to £1,260 additional tax-free personal allowance from a non-tax paying spouse. And this could reduce your overall tax by £252 in the current tax year.

Pensions

Pensions can enable you to save for retirement tax-efficiently. In 2024-25 the maximum annual pension allowance stood at £60,000. So if your spouse places, say, £10,000 into their pension, you could top that up tax-efficiently with an additional £50,000.

However HMRC caps the annual pensions allowance at a person’s annual salary level. So if you earn £40,000 a year, you would usually only be able to put a maximum £40,000 a year into your pension tax-efficiently.

Incidentally, this approach could be used for other people, such as children and grandchildren, as well as spouses.

But non-working people can only contribute up to £3,600 a year to a pension. Under this arrangement, the non-working person contributes up to £2,880 and the government makes an additional contribution of up to £720.

ISAs

The government offers ISAs (Individual Savings Accounts) as a tax-efficient way for us to save and invest. HMRC imposes no taxes on investment growth, investment income or interest payments from ISAs.

The ISA allowance currently stands at £20,000 a year. If you have used up your own £20,000 allowance, then you may benefit from topping up your spouse’s unused ISA allowance as well.

HMRC also allows you to inherit your spouse or civil partner’s ISA allowance if they pass away. For instance, if they held £10,000 in their ISA, your allowance for this tax year would be the normal £20,000 plus this inherited £10,000 allowance. So you could save up to £30,000 tax-efficiently.

Capital gains tax allowance

HMRC applies capital gains tax (CGT) when you sell an asset that has risen in value, such as an investment property or piece of fine jewellery.

The government does, however, offer a tax-free CGT allowance. But it has cut this drastically, from £12,300 in 2022 to just £3,000 in the 2024-25 financial year.

If you’re in a marriage or civil partnership, then you and your partner both benefit from the CGT allowance. So if you sell an asset that you hold jointly, you can effectively double the potential tax-free gain you make on it.

Dividend allowance and tax rates

Dividends are income payments companies make to holders of their shares. The government currently allows each of us to receive dividend income of £500 a year tax-free. This dividend allowance stood at £2,000 a few years ago.

Once again, both partners in a marriage or civil partnership have their own dividend allowance. Let’s imagine you’re set to exceed your dividend allowance but your spouse is not. In this case decreasing your share ownership while increasing your spouse’s could be an effective way to use up both of your allowances. Spouses can transfer assets, including shares, between themselves tax free to make use in full of any available CGT or dividend allowances. But doing so does change the legal ownership of the assets.

If you exceed the dividend allowance, the rate of tax you pay on dividend income will vary depending on your overall income. So if your total income (including dividend income as well as salary) exceeds £50,270 but falls below £125,140, then you will pay the 33.75 percent ‘higher’ rate of tax on your dividends. But if your spouse’s income (including dividend income) is less than £50,270 then they will pay tax on dividends at the 8.75 percent rate. So if your spouse earns less than you, it may sometimes be appropriate for them to own the dividend-paying shares.

Potential risks

Couples can benefit when they make effective use of both partners’ allowances and tax thresholds. But this approach could work against them if the partners have different views on their financial arrangements and different financial goals. And even if these views and goals do align, they may diverge over time.

You may also be concerned about how investments and assets placed in your name for tax purposes might impact your rights to child support or spousal maintenance if you split up. But this would be unlikely to hinder your eligibility or your rights if things don’t work out. So effective use of these spouse’s allowances and tax thresholds may bring you greater ‘pros’ than ‘cons’.

At Schroders Personal Wealth, one of our key principles is to have regular reviews with a financial adviser. This can help ensure you and your family, if you have one, make the most of your tax allowances and adjust your financial plans as your life evolves.