If you or your partner has a pre-tax income of more than £50,000 a year, you’ll have to pay back some (or all) of your Child Benefit in the form of extra Income Tax.
Each person’s income is taken in isolation, so if one partner has an income exceeding £50,000 each year, the higher earner will have extra tax to pay – known as High Income Child Benefit Charge – but the child benefit amount will still be paid.
If either income exceeds £60,000 the extra tax will cancel out the Child Benefit amount.
Anyone with income below £50,000, which can include both partners, will receive the Child Benefit in full as no extra tax will become due.
For every £100 of income above £50,000, one per cent of the Child Benefit amount needs to be paid as High Income Child Benefit Charge via a self-assessment tax return.
Visit www.gov.uk/child-benefit-tax-calculator/main to work out how much tax will become due.
For those affected, there are options to mitigate some or all of the tax by reducing your taxable income.
This doesn’t mean getting a lower-paid job or even asking to reduce your hours and pay, but simply by making a pension contribution, opting to sacrifice salary for childcare vouchers (if your employer supports them) or by making charitable donations.
Pension payments taken from income before you pay tax have the effect of reducing your taxable income, so if you reduce your income to less than £50,000 (after all allowances) there will be no High-Income Child Benefit Charge to pay.
Additionally, pension contributions for those with this level of earnings will attract tax relief at 40 per cent with 20 per cent of the payment being reclaimed via self-assessment.
For example, someone with an income of £53,000 could make a pension contribution of £2,400 from their pre-tax income.
This would be increased to £3,000 when 20 per cent basic rate tax relief is added, meaning their income level would fall from £53,000 to £50,000 thereby avoiding the High Income Child Benefit Charge.
Additionally, as a higher rate taxpayer, extra tax relief could be claimed via self-assessment, meaning the actual pension payment has only cost the individual £1,800 for the £3,000 being saved into the pension arrangement.
An unintended consequence of the High Income Child Benefit Charge is that some people, whose individual earnings are above the threshold, are no longer claiming Child Benefit to avoid the tax, meaning those who have a partner who is not earning or are a lower earner could be missing out on an element of their accrual to the State Pension scheme.
It is possible to elect not to receive the Child Benefit, and avoid the payment of extra tax, however, you are still encouraged to complete the Child Benefit claim form so you continue to accrue National Insurance (NI) credits.
You now need a minimum of 10 qualifying years to receive anything from the state and 35 years to qualify for the full state pension.
This is why it’s important to still claim the benefit even if there is no monetary value and you can still elect not to receive the actual payment.
At Armstrong Watson, our quest is to help our clients achieve prosperity, a secure future and peace of mind.
If you are affected, our experts can provide independent financial advice based on your personal circumstances.
Please contact Paul Moody, on 01768 222030 or email paul.moody@armstrongwatson.co.uk
