HMRC issues £663 warning to state pensioners who transfer money to partner

State pension loophole means you could end up paying tax next year. The loophole means you could end up unexpectedly paying tax next year, state pensioners have been warned, with the issue relating to Marriage Tax Allowance from HMRC.

As it stands, you can transfer 10% of your £12,570 personal allowance, which is around £1,260, to a basic-rate taxpayer partner. This can reduce their tax bill by around £252 with those eligible able to backdate claims by four years, totalling £1,258.

But due to the freeze in income tax thresholds and the rise in state pension under the Triple Lock, it can see lower earners handing over 10% of their personal allowance and then being taxed themselves. The full new state pension is worth £11,502 a year so transferring 10% of their personal allowance would end up with £11,310 left.

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This would mean they pay tax on £192. Steve Webb, former Liberal Democrats pensions minister and partner at pension consultants LCP, said: "The ongoing freezing of the personal tax allowance has created all sorts of unintended consequences.

"We are now in a situation where hundreds of thousands of married women need to choose between starting to pay tax on their pension for the first time, or revoking their marriage allowance and putting up their husband’s tax bill by hundreds of pounds.

"The whole situation is a complex nonsense." The warning for Sir Steve, who is now a law partner at a leading law firm having served as Pensions Minister under the Conservative Party and Liberal Democrats coalition government, comes as fresh figures emerge.

Thanks to the Triple Lock, next April will see someone on a full new state pension handed £11,973 a year from the Labour Party meaning they would end up paying income tax on £663 if they transferred 10% of their personal allowance.