Before 1990

Before 1990, the income of a married couple was added together for tax purposes and treated as if it were the income of the husband. A married man had a personal allowance, which was just over one and half times the single person’s allowance. A married woman who was at work had her own allowance – Wife’s Earned Income Allowance (WEIA) – which was the same as the single person’s allowance, but all the allowances including the WEIA were in law given against the husband’s income which included his wife’s income. The system had its roots in the social legal concepts of the early nineteenth century.

This system of taxation could not continue. It was out of step with contemporary society. Moreover, there were anomalies which were difficult to defend.  However, the pre-1990 system did not discriminate against single parents or cohabiting couples. An additional personal allowance (APA) was given to one- parent families (and cohabiting couples with a child living with them). As a result, a single person with children received a total personal allowance equal to the married man’s allowance, and was therefore in the same position as a one-earner married couple. There was also a Widows Bereavement Allowance (WBA).

1990 Changes

The story begins in 1986 with Nigel Lawson’s Green Paper entitled ‘The Reform of Personal Taxation’. Nigel Lawson proposed a system of independent taxation, which he saw as providing a better – not worse – deal for families. The Government of the day had three main objectives:

  • to give married women the same opportunities for privacy and independence in tax matters as their husbands
  • to remove discrimination against marriage and the family
  • to raise the tax threshold in a cost-effective way so as to reduce the tax burden on families with low income.

Under the 1986 proposals, everyone – man or woman, married or single – would have a tax allowance in their own right, whether or not they were in paid employment. To recognise the shared responsibilities of a married couple, a spouse who did not have enough income to use up their own allowance would be able, if they wished, to transfer the balance to their partner. The incomes of a husband and wife would no longer be added together for tax purposes, and all taxpayers would be able to have independence and privacy in their tax affairs. The aim was that no couple would suffer a reduction in cash terms in their total allowances. The ultimate aim was to get to a position where two new-style allowances amounted to the same as the total allowances available to a two-earner couple before the change.

The Government of the day argued that the tax system should not discriminate against families where one spouse wished to remain at home to care for young children. Transferable allowances would provide recognition through the tax system that, at different times and for different reasons, one partner in a marriage may be financially dependent on the other. With transferable allowances there would not have been discrimination against couples where, for whatever reason, one spouse was not in paid employment.

In the event transferable allowances were not introduced. In their place a new allowance–the Married Couples Allowance-(MCA)  was introduced and, the equally valuable in monetary terms, Additional Personal Allowance which those with responsibility for children who could not qualify for the MCA could claim was retained.

In his 1988 Budget Speech, Nigel Lawson said that the reforms had two objectives – first, to give married women the same privacy and independence in their tax affairs as everyone else; and second, to bring to an end the ways in which the tax system could penalise marriage.

Under the system of independent taxation which was introduced in 1990 and still applies, the amount of income tax people have to pay depends on the rate of tax and the personal allowance – the slice of tax-free income to which they are entitled. Since 2000 everyone has been entitled to the same personal allowance, whether they were single or married, male or female, and whether they had children or were childless. The result is that everyone pays the same amount of income tax if their income is the same. How well they are is irrelevant.

The big gainers from the introduction of independent taxation were high-income two-earner couples, who were liable to higher rate tax when their incomes were aggregated, but only to basic rate tax when their incomes were taxed separately.

Ordinary two-earner couples whose combined income was below the higher rate threshold (which in real terms was much higher than it is today) were in effect taxed separately on their earned income. They stood to lose from the change to independent taxation because they would no longer get a tax-free slice of income equal to two and half times the single person’s allowance. One-earner married couples also stood to lose as, instead of allowances worth 1.6 times the personal allowance (two and a half times if the wife was the sole earner), they would get only the single person’s allowance. It was recognised in 1990 that this could not be allowed to happen.

Both the MCA and the APA allowances were originally given, like other personal allowances, as a deduction from the taxpayer’s income before his or her tax liability was calculated, and in effect gave relief at the taxpayer’s marginal rate of tax. The higher rate threshold was therefore higher for families.

In 1994/95 the MCA was restricted to a fixed amount (20% of the allowance); it was no longer available at the taxpayer’s marginal rate. It was restricted to 15% in 1995/96 and then to 10% in 1999/2000. The MCA was abolished from 6 April 2000 for people born after 1935. The APA was also abolished in April 2000. With the loss of these allowances, families began to be disadvantaged by independent taxation.

For more information see the report "independent Taxation 25 years on" which can be found on the Reports page.

It used to be said that these allowances were “something of an anomaly”. It now seems clear that in the absence of transferable allowances they were an essential if families were not to be disadvantaged by the change to independent taxation.