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.
