Taking vital steps before the new tax year

You need to act fast to avoid next year’s child benefit charges

Families impacted by the high income child benefit charge need to act now to limit or avoid it in the next tax year. Doing this could make them potentially up to £2,449 better off, but they only have until the 6th April 2014 to take some vital steps for the 2013/14 tax year, according to Standard Life.

The high income child benefit charge, introduced on 7 January 2013, affects more than one million families. A family with two children could see their annual income drop by up to £1,752 in 2013/14; those with three children could lose £2,449.

At a time when the cost of living is rising faster than incomes, Standard Life believes it is important for many families to know how they’ll be affected by the high income child benefit charge, and to find out what options they may have to improve their situation next year.

Child benefit payments will continue to be paid in full, but they will be clawed back by way of a tax charge if a person, or their partner, have an individual income of more than £50,000.

Ten key ways people may be able to limit the amount of tax they will have to pay in the 2013/14 tax year on their child benefits:

Make an individual pension contribution to reduce income to below £50,000. This would wipe out the High Income Child Benefit Charge altogether, and they will benefit from higher rate tax relief on their contribution.

If somebody can’t afford to make a contribution that reduces income to the £50,000 threshold, then any contribution reducing income to below £60,000 will still result in a surplus of child benefit over the tax charge. They would still have to complete a tax return though.

Make a pension contribution by salary sacrifice. With the agreement of their employer, an employee can reduce their contractual income in return for an equivalent employer payment to their pension. In addition to the tax savings above, the employee will also save National Insurance (NI) at 2% for payments over the upper earnings limit, and the contribution itself can be increased if the employer agrees to pass their 13.8% NI saving on to the pension. A contribution by salary sacrifice could mean that a tax return isn’t needed.

Some employers may also offer salary sacrifice for child care vouchers. This works in a similar way to making a pension contribution through salary sacrifice, although limits apply to the number of vouchers that can be purchased, so check to see if this is possible.

Where both partners are making a pension contribution, consider upping the highest earner’s contributions and reducing the lower earner’s. The adjusted net income of the highest earner will be reduced at no extra cost to the family as a unit. Child benefit tax may be saved, and higher rate tax relief can be claimed on the extra contribution.

Payments to charity under gift aid reduce taxable income in a similar way to an individual pension contribution. Gift aid payments are paid net of basic rate tax, and so must be grossed-up before deducting from income.

If the person being assessed to the tax charge is also the holder of income bearing investments, consider transferring these to their lower earning partner. As the gross value of savings income is included in taxable income, this simple solution could make a difference.

Do nothing. Continue to claim the benefit and pay the tax. This is more likely to be a consideration for those families where the higher earner has adjusted net income between £50,000 and £60,000, when the benefit will still exceed the tax charge. They may not be able to afford to see their net spendable income fall further by making a pension contribution. Again, this group should be reminded of their obligation to complete a tax return.

Where the high earner has taxable income in excess of £60,000, some families may conclude that it’s not worth making a claim for child benefit in the first place. After all, they won’t be any better off financially. But there’s still an incentive for some. Assume that one parent stays at home to look after the children and doesn’t work. As they won’t be paying national insurance (NI), they won’t be building up any entitlement to State Pensions. But by claiming benefit for a child under the age of 12, they will receive NI credits which will protect their entitlement.

A family can still claim child benefit, perhaps for the reasons above, but avoid the tax charge by asking HM Revenue & Customs (HMRC) to stop the payments. The high earner will then only be taxed on any payments received up to the date payments stop. A self-assessment return will still have to be filed if any payment is received in a tax year. Payments can be restarted if a client’s circumstances change.

Increases in the cost of childcare

 Families are feeling the impact of benefit cuts

The cost of bringing up a child has reached £227,266, up from £222,458 last year, with the first year of a child’s life seeing the largest increase.

According to the annual ‘Cost of a Child’ report from protection specialist LV=, the cost of a child’s first year has risen by 50% (£11,025 up from £7,372) since the first report in 2003. In the past 12 months, it has increased by 5% and this is largely due to the cost of childcare for children aged less than a year (1) rising by 7% (£6,623 up from £6,191 in 2013). In total, parents now spend £66,113 on childcare – an increase of 4% overall.

Education and childcare remain the biggest costs, and 71% of parents report that they have been forced to make cuts to meet the financial demands of raising their family. The overall cost of raising a child has increased by 62% since 2003.

The cost of living
Parents have been hit hard by increases in the cost of living, as more of their income is spent on essential goods and services such as rent, household bills and food – items that have seen particularly rapid inflation over the past few years (2). The overall cost of goods and services purchased by parents has increased by 33.6% in 10 years, compared with 30.7% for the headline consumer price index, meaning that prices have been rising almost 10% faster for parents (3) than the general inflation rate. Single parent’s families have been hit even harder with the overall cost of goods increasing by 34.7% over the same period. This comes at a time when many benefits have been put on hold and wages have not kept up with inflation.
The increasing cost of raising a child means that parents are now estimated to be spending on average more than a quarter (4) (28%) of their annual income on bringing up their child each year – up from 23% in 2004. For single parent families, this figure rises to more than half (54%) (5) of their annual income.

Working more hours
Alongside the rising cost of raising a family, the changes to Child Benefit in January 2013—which saw many families lose some or all of their child benefit—have affected many households. One in four mums (27%) have returned to work earlier than they wanted to and close to one in five (19%) have had to work more hours than they intended to. Meanwhile, one in ten parents (11%) have now chosen to have a smaller family, and one in five (21%) are delaying having an additional child because they now can’t afford it.

However, with the cost of average childcare costing £405 (6) a month across Britain, mums now say they personally need to earn an average of over £26,000 a year to make it worthwhile returning to work.

Protecting the family finances
The need to make the family finances go further has taken its toll on the amount parents are likely to put aside for the future. One in three (34%) say they’ve had to reduce the amount they save, and one in 10 (10%) have had to cancel or review their insurance products and income protection cover to help with family budgeting. In fact, 41% of parents now have no life cover, critical illness or income protection cover at all.

Source:

Cost of a child calculations, from birth to 21 years, have been compiled by the Centre of Economic and Business Research (CEBR) for LV= in December 2013 and is based on the cost for the 21 year period to December 2013. Using data from the ONS’ Family Expenditure Survey, CEBR also were also able to compile a measure of inflation for families, in contrast with the overall CPI measure.

Additional research was conducted by Opinium Research from 13 to 16 December 2013. The total sample size was 2,001 UK adults and was conducted online. Results have been weighted to a nationally representative criteria.

1. CEBR’s model assumes that parents go back to work after 6 months (what’s known as “ordinary maternity leave”). It then tracks the cost of childcare for the remaining 6 months of the first year, using a combination of data from the Office for National Statistics and desk research from other sources. This cost has increased significantly over the past 12 months.
2. Calculated as December 2013 versus December 2003. Single parent households on average have significantly lower income than two parent households [£19,444 for the average single parent household, versus £38,762 for the overall UK average household and £52,140 for two parent households]. This means that a much greater share of expenditure is made on essential items such as rent, household utility bills, and food. It is these products that have seen particularly rapid inflation over the past few years [e.g. the December 2013 inflation figures showed a 3.7% annual increase in the cost of rent and utilities], whereas prices on more luxury items such as recreation & culture have seen smaller increases [the same figures showed just a 0.8% annual increase in the cost of recreation and culture]. As such, the total basket of goods and services purchased by these single parent households has seen faster price inflation than the basket of those bought by two parent families.

3. Family households spend a much greater share of expenditure on essential items such as rent, household utility bills, and food. It is these products that have seen particularly rapid inflation over the past few years.

4. According to CEBR, the cost of raising a child from birth to 21 now costs £227,266 or £10,822 per year. The average (mean) annual household gross income is £38,762. This equates to 28% of the average income spent per year on bringing up a child i.e. £227,266 divided by 21 = £10,822. 100 divided by £38,762 x £10,822 = 28%. In 2003 this was just 23% (in 2003 the cost of raising a child was £140,398 or £6,686 per year. The average mean annual household income was £29,406 so £140,398 divided by 21 = £6,686. 100 divided by £29,406 x £6,686 = 23%).

5. Due to the lower income of single parent families, the average annual cost of raising a child is equivalent to 54% of average gross annual income of £20,000.

6. According to DayCareTrust the average cost of childcare across Britain is £101.29 per week (for 25 hours) x 4 = £405.16. (Child Care Costs Survey 2013, page 4)

Tax attack

Legitimate planning could save you money by reducing a potential tax bill

With tax increases the prospect for the foreseeable future, it is essential that you make the most of every available tax relief. Using the tax breaks available to you also makes good financial sense.

Different ideas will suit different people. If you would like to discuss any of these opportunities, we can recommend solutions that are tailored to you. We’ve provided some examples of the ways in which legitimate planning could save you money by reducing a potential tax bill in the run up to the tax year end on 5 April 2014.

Retirement
Investing in a pension is one of the most tax-efficient ways to save for your retirement. From 6 April 2014, the pension lifetime allowance (LTA) is being reduced from £1.5m to £1.25m which could radically affect your retirement strategy. The LTA is important because it sets the maximum amount of pension you can build up over your life and benefit from tax relief.

If you build up pension savings worth more than the LTA, you’ll pay a tax charge on the excess, potentially at 55%. However, some affected individuals could elect for ‘Fixed Protection 2014′ before 6 April 2014, and the £1.5m limit can be preserved. From 6 April 2014 (until 5 April 2017), individuals will also have a fall-back option of electing for ‘Individual Protection 2014′ to preserve their individual LTA at the lower end of £1.5m, the actual value of their pension fund at 5 April 2014 or the standard LTA (i.e. £1.25m in 2014/15).

If the total of all your pension funds is likely to be at or near £1.25m by the time you retire, you should quickly seek professional advice on whether opting for Fixed Protection 2014 and/or Individual Protection 2014 is appropriate.

The annual contribution limit for an individual (the total of personal contributions and those made by an employer) is £50,000, within pension input periods (PIPs) ending before 6 April 2014, and you receive tax relief for the contributions at your highest marginal tax rate. But from 6 April 2014, the maximum reduces to £40,000.

If you have not made contributions up to the limit in 2010/11, 2011/12 and 2012/13, then the unused relief may be available for carry forward into 2013/14. However, you must have been a member of a registered pension scheme in the tax year giving rise to the unused relief, and any contributions made in the year reduce the amount available to bring forward.

A pension contribution paid before 6 April 2014 also reduces both your tax bill for 2013/14 and, if appropriate, your payments on account for next year.
Tax relief is available even for non-taxpayers, so you can invest in a pension for a non-earning spouse. Non-earners can contribute £3,600 per tax year (the Government will automatically pay £720 in tax relief, reducing the amount you pay to just £2,880).

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

Individual Savings Accounts (ISAs)
Make sure that you use your 2013/14 ISA allowance to shelter your savings from tax. There is no capital gains tax or further income tax to pay on investments held in an ISA, making them one of the most tax-efficient ways to invest.

In the current tax year you are permitted to invest up to £11,520 into a Stocks & Shares, or alternatively you can invest up to £5,760 in a Cash ISA and the remaining amount in a Stocks & Shares ISA. In the new tax year (6 April 2014 – 5 April 2015), the limit rises to £11,880, meaning in the next few months a couple could shelter £46,800 from tax using both years’ allowances.
Junior Individual Savings Accounts (JISAs) enable parents or grandparents to save up to £3,720 a year, tax-efficiently, for their children or grandchildren.

The value of investments and income from them may go down. You may not get back the original amount invested.

Inheritance 
If appropriate, consider making individual gifts of up to £3,000, which you can do each year free from Inheritance Tax (IHT). You could also use any unused allowance from the previous year, meaning a couple can give away up to £12,000 now and a further £6,000 on 6 April, potentially saving £7,200 of IHT (charged at 40%).
Have you made a Will? A good Will should minimise tax and give your family flexibility and protection. Dying without one means your assets will be distributed to your family without reference to your wishes using the intestacy laws, potentially after IHT at 40% is paid.
If you already plan to make substantial gifts to charity in your Will, leaving at least 10% of your net estate (after all IHT exemptions, reliefs and the ‘Nil Rate Band’) to charity could save your family IHT.

In many family circumstances, the use of a formal trust can help you protect and enhance your family’s future finances. The timing of creating a trust may have significant tax implications so, if you have long-term financial goals, the sooner you seek expert advice on your options the better.

Inheritance Tax Planning, Will Writing and Trust Advice are not regulated by the Financial Conduct Authority (FCA).

Capital gains
Everyone has a capital gains tax (CGT) free allowance of £10,900 in the current tax year. If you haven’t realised gains of this amount, take a look at whether assets can be sold before 6 April 2014. If you have used up your allowance, consider deferring selling assets until the next tax year or transferring them to a partner. If your spouse either pays no tax or at a lower rate, you could reduce the tax bill substantially.

Bed & ISA is one effective way to use your CGT allowance. By selling your shares or funds and immediately buying them back inside this year’s ISA as a contribution, you can harvest gains, sheltering future growth from tax.

You can increase your CGT annual allowance by registering any investment losses on your tax return. Once they have been registered, you can use them to offset gains made in the future, effectively increasing your CGT allowance.

If you have substantial investments, consider rearranging them so that they produce either a tax-free return or a return of capital taxed at a maximum of only 28%, rather than income taxable at a maximum of 45%.

Tax advice is not regulated by the Financial Conduct Authority (FCA).

Advanced investments
Tax-paying, sophisticated investors who are prepared to take higher risks in return for the potential for higher rewards should be aware that attractive income tax reliefs are available. If you are a tax payer, you will receive a tax rebate of up to 30% (subject to your total income tax bill) when investing in a Venture Capital Trust (VCT). Enterprise Investment Schemes (EIS) income tax relief of 30% – up to a maximum of £300,000 reclaimed tax in any year. Seed Enterprise Investment Scheme (SEIS) income tax relief of 50% for subscriptions for shares of up to £100,000, irrespective of the investor’s marginal tax rate.

The value of investments and income from them may go down. You may not get back the original amount invested. Some funds will carry greater risks in return for higher potential rewards. Investment in smaller company funds can involve greater risk than is customarily associated with funds investing in larger, more established companies. Above average price movements can be expected and the value of these funds may change suddenly.