The transferable allowance and the Autumn Statement – What we now know

We’ve known for a while that George Osborne would announce plans to introduce a transferable allowance for married couples in the 2013 Autumn Statement. Despite his apparent opposition to the idea – seen by many as the reason for its introduction so late in the day – he duly obliged. Now that we know a little bit more about what this allowance will look like and how it will operate, thanks both to the Chancellor and the good people at the IFS, I’ll outline three things that have particularly caught my attention.

Before I do this however, let me briefly explain how this policy will work.

The details

A transferable allowance for married couples allows a non-earning spouse or civil partner to transfer some or all of their unused tax allowance to the working spouse or civil partner. On the basis of what was announced on Thursday, this means that a non-earner will be able to transfer up to £1,000 per year of their unused allowance to the working spouse or civil partner, resulting in a tax break of £200 per year. The benefit will also be limited to couples paying the basic rate of tax (20%). There are also complications relating to Universal Credit entitlement, which are covered here.

There are three points in particular which we should question.

1. Will it still benefit those in the lower half of the income distribution?

I noted in an earlier piece[C1] , the personal income tax threshold increasing to £10,000 in 2014-15 (meaning one can earn this amount without being taxed a penny in Income Tax) might alter who will benefit from a transferable allowance. In other words, it could be argued that because the allowance is due to increase to £10,000 in 2014-15 the poorest will not benefit. To gain any benefit from this policy a person with a non-earning spouse or civil partner will have to be earning enough to pay the basic rate of tax, which in this case is above £10,000. If a worker earns below this figure, they won’t benefit.

Even so, it remains the case that those in the lower half of the income distribution will disproportionately benefit in comparison to those in the upper. The graph below from the IFS ably demonstrates this point.

IFS 2014-15 income distribution graph

It is also worth noting that, according to the IFS, the income gains resulting from the transferable tax allowance are ‘more focused on lower-income households than the increase in the personal allowance’ food for thought for those vociferously in favour of increasing the personal allowance up to and beyond £10,000, as both David Cameron and Nick Clegg seem to be.

2. What does it mean that this is ‘just a start’? What is the situation for higher rate taxpayers

In an effort to perhaps stave off criticism of those (including me) who have attacked the amount of the transferable allowance, David Cameron has said that the allowance in its current form is only ‘a start’ and that he hopes to extend it. What this extension will look like is anyone’s guess. It could be the amount given to basic rate taxpayers is increased, or perhaps even a change in eligibility so that higher rate taxpayers are included.

How any extension would work will be intriguing because as James Browne of the IFS noted last week, the transferable allowance in its current guise has a ‘cliff edge’, meaning that as soon as someone on basic rate tax (20%) moves onto the higher rate (40%) they lose all of their allowance. Whilst at present the loss would be small (£200 per year), if the amount were to be extended the loss would obviously be greater. This has implications for David Cameron’s ‘Aspiration Nation; why should a primary earner take a pay rise which results in them moving from the basic to higher rate of tax if it would be eroded by a loss in transferable allowance?

Further, due to the higher rate threshold – or the income point at which someone begins to pay the higher rate of tax – being consistently reduced since 2010, families on incomes of £41,450 and below (the 2014/15 higher rate threshold) will be paying 40% income tax. Hence, these families aren’t exactly ‘well-off’ (a one-earner couple family with two children on this income are in the lower half of the income distribution) and could well do without losing any transferable allowance they might be eligible for in the future.

3. Will it be in household’s pockets before the 2015 General Election?

Prior to the Autumn Statement, the Daily Telegraph reported that although the transferable allowance is to be introduced before the General Election in 2015, it won’t be in people’s pockets until a year after, in the summer of 2016. This timetable is confirmed by a statement from the Treasury which was released on 30 September.

This arguably leaves the policy in a rather precarious position. If it isn’t actually in effect by May 2015, then a new Government – particularly if it is a Labour majority or Labour-led Coalition – could quite feasibly scrap it. Yet, according the Autumn Statement documentation, money is scheduled to come out the Treasury’s coffers in 2015-16, the year of the General Election. Does this mean that money will be spent in 2015-16 getting the IT systems right etc. (those eligible will have to claim online after all) before any benefit is delivered a year later? Or will both the preparation and the allocation of funds happen in 2015-16 before the General Election? The answer doesn’t seem particularly clear at the moment, although based on what we know so far my money would be on the former. If this is true, it spells trouble for proponents of this policy and for the Conservatives who are in risk of not delivering on a promised flagship policy during this parliament.

In closing, whilst supporters of this policy will be pleased that it was finally announced last week, we now know that there at a number of issues to resolve before its implementation. These relate to the ‘cliff edge’ problem and its perplexing timetable. If these issues aren’t resolved before the 2015 General Election, then the Conservative Party in particular could be punished. Given how tight things could get come May 2015, the Tories can ill afford such chastisement.