Single-income families can reduce the financial impact of the tax system by using a £2,880 pension contribution rule, according to investment firm AJ Bell. The firm said the UK government penalises single-income families financially by assessing income taxes and benefit thresholds on an individual basis rather than by total household income.
Some areas where people in this situation are targeted include the High Income Child Benefit Charge, which claws back Child Benefit if an individual earner makes over £60,000 a year. It does not look at total family money.
How the tax system affects one-earner households
A dual-income household where two parents each earn £59,000 (£118,000 total) keeps 100% of their Child Benefit. A single-income household earning £80,000 total loses every penny of their Child Benefit.
Also in tax, every UK resident gets a standard tax-free Personal Allowance of £12,570. If one spouse earns £60,000 and the other earns £0, taxes apply heavily to the higher earner’s bracket above £12,570. If a couple splits that exact same £60,000 income as £30,000 each, both use their separate tax-free allowances, resulting in a much lower overall tax bill.
This is partly mitigated by the Marriage Allowance, which lets a non-working or low-earning partner transfer just £1,260 of their unused tax-free allowance to a basic-rate working spouse. However, this saves a household a maximum of only £252 a year. It does not bridge the large financial gap caused by losing a second full personal allowance or being pushed into higher tax brackets.
Pension and childcare benefits for single-income couples
AJ Bell has explained the benefits couples with one income can still get. Investment expert Hannh Williford said: “When children come into the picture, many couples decide to transition to one parent remaining at their job and one staying at home to raise their child. This is a very personal decision. There is no right or wrong answer to managing the demands of a family. But going down this route does mean a big shift in your lifestyle and finances.”
Single-income households can sometimes face more tax than dual income, because tax rates are applied to people individually instead of spread across both parties. For example, two parents making £40,000 each would have a larger take-home income than one parent earning £80,000, because they pay the higher rate of tax. It also makes parents ineligible for some benefits, such as tax-free childcare and additional free (funded) childcare hours.
Williford added: “But there are many benefits to it as well, and if you’ve decided a single-income household is the right choice for your family, there’s a few policies to be aware of that could save single-income households thousands. Some of these rules will apply to anyone in a partnership, but for others, you will need to be their spouse or civil partner. In general, spouses and civil partners receive much more flexibility in sharing their finances under HMRC regulation.”
Pension contributions and savings opportunities
Pensions can be targeted, Williford said, and a partner not earning income can still put £2,880 into their pension each year, with government tax relief applied at 20%, making the total contribution £3,600. She explained: “This could be useful if the working partner has used up their own pension contribution limit of the lower of £60,000 or 100% of their salary, as they can contribute the additional amount to their partner’s pension.”
“If the working partner is a higher or additional rate taxpayer, it typically makes sense for that partner to use up their own allowances first, because they will be getting relief at the higher rate or additional rate for income tax, instead of the flat 20% offered to the non-working partner and may be getting employer contributions on top.”
The main childcare benefits entitlements for families with a stay-at-home parent include the free (funded) hours childcare scheme and child benefit. Williford explained: “To be eligible for child benefit, which is a weekly rate of £27.05 for the eldest child and £17.90 for any additional children, both partners must earn under £80,000 with reductions for benefits beginning at £60,000. For free childcare hours, all parents will have access to 15 hours each week. To gain any additional hours, both parents would need to be working, and no parent could have an adjusted net income above £100,000.”
Finally, savings is an area where there is a potential benefit. Williford said: “Those who are spouses or in a civil partnership can transfer money between them with fewer tax implications. Even if only one person is earning the money, they can use their own ISA allowance of £20,000 and then gift another £20,000 to their spouse or civil partner to be invested in their ISA. However, once that money is gifted, it is legally theirs.”
“For those couples that are fortunate enough to use up both of their ISA allowances, it can also be more tax-efficient to invest in the name of the stay-at-home parent rather than the working parent, because they will be taxed at the basic rate for income and capital gains tax, as well as having their full personal allowance of £12,570 still to use.”
