Each year when doing their tax return or thinking about their old-age and surviving dependants insurance (AHV), married couples are reminded that they have to incur financial losses due to their marital status. As a result, young couples are increasingly considering whether they want to get married at all. The reason for this is the marriage penalty, which is every bit as unromantic as it sounds. In political discussion, the financial inequality suffered by married people compared to cohabiting couples is referred to as discrimination. And in actual fact, according to precise figures from the Swiss Federal Supreme Court in 1994, discrimination exists where there is a difference of 10% or more. But how does the marriage penalty look in practice and whom does it affect?
What is the marriage penalty?
The political catchphrase “marriage penalty” is a criticism in Switzerland that married people are, under certain circumstances, in a less favourable financial position than unmarried couples. Higher-earning couples with similar incomes are at a particular disadvantage. But what exactly is this marriage penalty and how are couples “penalized” by being married? We explain what lies behind it in this article.
Tax disadvantages through progressive taxation
Normally, the individual taxable income of private individuals is classified in a progression table and taxed at the rate of that tax class. But for married couples, income isn't considered individually for taxes, but added together. Since the tax rate increases for each class in the table, a higher percentage of tax from taxable income is charged per class. So married couples, who are taxed together, naturally fall into higher classes in the progression, as their salaries are added together. In a fictitious example, a couple who would each pay 10% of their taxable income in taxes on the basis of individual taxation would pay more tax at a 15% rate through joint taxation.
The marriage penalty actually means that for dual-income couples where both partners earn 75,000 to 125,000 francs annually, there is an added tax burden of around 10% compared to cohabiting couples with the same income.
Married couples with equal earnings also lose out with the AHV pension
The marriage penalty also applies to pensions: a retired married couple receives a maximum of 150% of the maximum pension. In other words, one married person receives 100% of the pension, while the other is allocated only half. However, unmarried couples receive both pensions in full – i.e. a total of 200%.
This model was intended for a traditional allocation of roles, where the man worked and the woman looked after the home. Something else that still applies today is that although married couples receive a lower pension, they also pay less into the AHV – in the case that one person in the marriage is unable to earn or earns significantly less.
However, as the trend for one person in a marriage not to be in employment is falling, the model is becoming increasingly outdated. Accordingly, married couples who earn well are effectively penalized financially for this. In concrete terms, it means that dual-income married couples each with an annual income of between 75,000 and 125,000 francs lose out.
Does marriage have benefits too?
Marriage does also bring financial advantages but these are usually only connected with death.
The following benefits are allocated to married couples in the case of the death of one person:
- Widow’s and widower’s pension: in case of death, the surviving person in the marriage is considered the widow or widower. So there is a claim to survivors’ benefits and inheritance.
- Benefits payable on death: spouses and children are automatic beneficiaries for benefits payable on death from the pension fund and pillar 3a.
Apart from this, there are also advantages when both spouses are still alive.
The following benefits are also enjoyed by married people:
- Inheritance and gift taxes: marriages are of great benefit in matters of inheritance and gifting. Depending on cantonal provisions, inheritance and gift taxes for married people are much lower or do not apply at all.
- AHV contribution prerogative: non-earners in a marriage are not obliged to make AHV contributions, and enjoy full benefits (except for the full pension), as long as the second person pays AHV contributions.
The future of the marriage penalty in Switzerland remains uncertain. While many cantons have adapted their tax legislation in recent years, there have been no changes yet at federal level. So from a financial point of view, it’s worth doing the sums before you tie the knot.