For some years now the child benefit tax charge for higher earners has had an impact on families and the implications of this charge aren’t always immediately obvious!
Child benefit can be claimed for all children under the age of 16. The current benefit is £20.70 per week for the first child and £13.70 for each additional child. So for 2 children this is currently £1,788 per annum.
The tax charge:
Where a parent has not requested that HM Revenue and Customs (HMRC) stop paying child benefit, a tax charge will be levied on the household’s highest earner if their personal taxable income exceeds £50,000 per tax year. It is interesting to note that if both you and your partner have an income just below the £50,000 limit, you’ll still continue to receive the full amount of Child Benefit
How is the extra tax calculated?
If you have an income of between £50,000 and £60,000 a year, the amount of extra tax you’ll have to pay will be 1 per cent of the amount of Child Benefit you get for every £100 of your income above £50,000.
So this would mean that should your income be £55,000 this would lead to a 50% reduction in child benefit – £894 if you have 2 children.
So what can be done?
Well one possible solution to this could be to make an additional pension contribution. If you follow the above example of someone how earned £55,000 then that individual could make a £5,000 pension contribution. This individual is a higher rate tax payer and so can claim effective tax relief on the payment of £2,000 – the net cost is therefore £3,000.
The pension contribution of £5,000 also reduces the net income to £50,000 and so 100% of the Child Benefit will be retained- £894 in the above example.
If you follow the example through a £5,000 pension contribution would receive £2,000 tax relief and £894 returned by way of child benefit and so the true cost of the £5,000 contribution would be £2,104!!!
There are other ways of doing it including charity contributions.
Whatever you circumstances we believe that advice is essential. So for this or any other financial matter please contact our office for a FREE initial discussion.