Who will benefit from the tax break for married couples?

Universal Credit means that married couples with children will only receive a small proportion of the gains

David Cameron’s announcement of a marriage tax allowance has attracted significant interest. The policy will make £1,000 of personal income tax allowance transferable between adults who are married or in a civil partnership, provided the higher earner is a basic-rate taxpayer and their partner is not paying income tax.

At this stage, all estimates of who will be affected are just that – estimates. Not least because it is as yet unclear just how the allowance will be administered – and therefore how widely it will be taken up. But, digging beneath the headline numbers, it appears that a significant proportion of the intended beneficiaries will find their gains greatly reduced after the first two years of the allowance’s operation. This will occur from 2017, following the full introduction of Universal Credit, the government’s merger of several benefits into one monthly payment.

As the IFS has already pointed out, only around one-third (3.9 million) of the UK’s 12.4 million married or civil partnership couples stand to benefit from the marriage tax allowance. One-third of those who qualify will do so on the basis of unearned income – primarily pensions – meaning that the number of “in-work couples” likely to benefit is in the region of 2.7 million.

These in-work couples comprise those either with a single earner, or where a second earner has a job paying below the full personal tax allowance (PTA) – just over £10,000 a year in 2015-16. From a distributional perspective, the exclusion of households with a higher-rate taxpayer (those earning above £42,285 in 2015-16), together with the exclusion of dual earners (above the PTA), means the gains from the marriage tax allowance are less skewed towards the top half of the household income distribution than are those associated with increases in the PTA.

However, the distributional consequences of this tax-change will be significantly affected once Universal Credit is considered. Indeed it only really makes sense to think about the impact of marriage tax allowance, and any other tax changes proposed for the next Parliament, in the context of Universal Credit. This is because many households on low to middle incomes – particularly families with children – will find that most of the reduction in their tax bill will be offset by cuts to their Universal Credit entitlement.

Analysis by the Resolution Foundation suggests that Universal Credit will have this impact for approximately two-fifths, or 1.1 million, of the roughly 2.7 million eligible in-work couples who would benefit from marriage tax allowance. And of the 1.1 million families falling into this category, four-fifths (or 0.9 million) will have children: so families with children are much less likely to receive the full gains from the marriage tax allowance. Indeed, almost two-thirds of couples with children who get the allowance will have most of it clawed back through a reduction in Universal Credit.

To be clear, in a strict sense these families will still pay £3.85 a week less tax as a result of the allowance. But when they receive their monthly Universal Credit, they’ll find that it has been reduced by the equivalent of £2.50 a week – leaving a net weekly gain of £1.35. That is, they immediately lose most of their gains. This deduction results from the fact that Universal Credit assesses entitlement on post-tax income so if your taxes are cut, you are considered better off and thus get less support. This is not a feature of the current tax credit system.

Another consequence of this claw-back is that the policy will become less costly to the exchequer once Universal Credit comes in (we estimate the cost will fall by £140 million each year).

So to recap:

• Of the 12.4 million couples in marriages or civil partnerships in the UK, around 3.9 million will benefit in one way or another from the marriage tax allowance.
• Of these, just over 1 million are non-working pensioner couples, leaving 2.7 million eligible couples with someone in work.
• Of these, roughly three-fifths (1.6 million) will make a net gain of the full £3.85 a week once Universal Credit is introduced. The remaining 1.1 million will gain only £1.35 per week because of the interaction with Universal Credit.
• Around four-fifths of the in-work couples getting the reduced gains from the marriage tax allowance (0.9 million of the 1.1 million) have dependent age children; whereas most of those getting the full amount (1 million of the 1.6 million) do not.
• As a result, once Universal Credit is introduced, around 85 per cent of couples who get the allowance will either not have dependent children or will get only a reduced amount of £1.35 a week. Put another way, just 15 per cent of recipients will both have children and benefit by the full £3.85 a week.

In principle, Universal Credit has the intention of making the complicated tax and benefits system that bit easier to negotiate. But it will also have important implications for the distributional impacts of tax cuts in the next parliament. It is important to note this applies to all future cuts in direct tax – whether in the form of a new 10p starting rate, further increases in the personal tax allowance, or indeed the marriage tax allowance. Each of these will be worth far less to a large swathe of low to middle income Britain than was the case in the past. Low and middle income families with children are particularly likely to miss out.