Budget 2012 is exactly a month away but it has already been leaked that George Osborne will not be introducing transferable allowances for married couples and civil partners. It was a Conservative manifesto pledge to introduce this in the current Parliament and the coalition agreement provides for Lib Dem MPs to abstain on the issue. However it looks like it won’t get that far in this budget round.

Proposals for a transferrable personal allowance for married couples

The Conservative proposals are to make £750 of the personal allowance transferable between spouses or civil partners where the higher earner is a basic rate taxpayer. The logic for this seems to be that £750 at 20% is £150 which is broadly in line with the £197 that married couples allowance (MCA) was worth in 1999 before its abolition for all but older couples (not taking into account inflation, of course). The allowance would taper away where the higher earner earned between £42,500 and £44,000. The Institute of Fiscal Studies has estimated the annual cost of the measure as £550 million.

Nick Clegg has made plain his opposition to the plan, attacking it again in December when he attacked the idea of “taking a particular version of the family institution, such as the 1950s model, and trying to preserve it in aspic”. A raft of Conservative MPs have attacked the decision not to introduce a transferrable allowance, which has much support on the right. They accuse Cameron and Osborne of failing to deliver. There is a fundamental ideological disagreement within the coalition on this subject.

Marriage in the tax system

The tax system has begun to recognise co-habiting partnerships as equivalent to marriage where the Treasury is paying out, for instance in respect of child tax credits which are administered by HMRC and in certain anti-avoidance provisions. Where it is less keen to recognise co-habiting partnerships as equivalent is where there are reliefs to be taken, for example in respect of the spouse exemption for inheritance tax and exemptions for inter-spouse transfers for capital gains tax.

For income tax purposes, we have had independent taxation for married couples since 1990 when the ‘married man’s allowance’ became the ‘married couple’s allowance’ and then from 1994 onwards this began to be tapered away. Do note this was a Conservative government who began de-coupling marriage from the income tax system.

Withdrawal of child benefit from higher rate taxpayers

However, despite much criticism, Osborne has confirmed that from 6 April 2013 child benefit will be withdrawn from higher rate taxpayers.

As the plans currently stand where one partner in a couple (and here we are not just talking about married/civil partnered couples) is a higher rate taxpayer all of the child benefit will be withdrawn. This is currently worth about £1,050 per annum for the first child and £700 for each subsequent child. There are currently no proposals to taper the ‘cliff edge’ or to make fairer the fact that dual earner households with an income of £80,000 would retain the child benefit but a household with one earner on an income of £43,000 would lose all of the child benefit. As it stands, this has the unfortunate consequence of penalising families with stay-at-home parents and disincentivising workers around the key threshold. The Institute for Fiscal Studies  has described the measure as creating ‘a bizarre and economically damaging set of incentives  for people within certain income bands’. They estimate that 200,000 families could find themselves with a lower net take home pay after a pay rise if they pass the threshold.

Administrative nightmare

Quite how an already over-stretched HMRC will cope with having to administer the withdrawal of child benefit (in whole or in part) from one half of a cohabiting couple in the 1.2 million families the change is estimated to affect remains to be seen, but can be guessed at by professionals who deal with them daily (slowly, badly and inconsistently is my best guess).

Perhaps the double whammy of withdrawing the child benefit and adding in a partially transferrable personal allowance would be the straw that would break the camel’s back.

A better way?

It seems unlikely that the small tax saving from a partially transferable personal allowance would appease the disgruntled ‘squeezed middle’ who will also lose chid benefit.

If the Conservatives really want to support the idea of marriage via the tax system the obvious solution would be to make the whole of the personal allowance transferrable between a married couple. This would be worth about £1,500 in 2011/12 for basic rate taxpayers . This would go significantly further in offsetting the withdrawal of child benefit. This could be coupled with the withdrawal of child benefit for higher rate taxpayers.

However, this would cost significantly more than the estimated £550 million that the token £750 transferrable amount would cost.

For and against

It does feel as if the coalition is tinkering around the edges with measures driven by political ideology rather than well thought out reforms, for although Ian Duncan Smith (and many of the Conservatives) believe that ‘stable two-parent families are vital for the creation of a strong society’ it seems unlikely that giving married couples with a low or non-earning spouse the equivalent of £150 will promote or recognise marriage in any meaningful way. In addition, the child benefit withdrawal is more likely to hit married couples who tend to be higher earners.