As inflation increases and wages do too, more and more of us will be pushed into a higher tax bracket. Although you might think this just means paying a little extra in income tax, it has other implications too, particularly for parents receiving Child Benefit.
Let us explain how an increase in earnings can impact your tax liability and what steps you might take if you fall into the ‘Child Benefit trap’
Child Benefit and earnings over £50,000
What many people don’t realise is that if either you or your partner earns more than £50,000 a year before tax, then you’ll have to pay back some (or all) of your Child Benefit in the form of extra Income Tax.
Who does the tax on Child Benefit affect?
The tax due on child benefit for those earning over £50,000 is based on each parent’s income taken in isolation, as opposed to the combined household income, so if one partner has an income exceeding £50,000 each year, the higher earner of the two will have extra tax to pay – referred to as the High-Income Child Benefit Charge – but the child benefit amount will still be paid. And if you or your partner’s income exceeds £60,000, the extra tax will cancel out the Child Benefit amount altogether. Anyone with income below £50,000, which could mean a couple each earning £49,999 (£99,998 in total) will receive the Child Benefit in full as no extra tax will become due.
How much tax will you pay on Child Benefit if you earn over £50,000?
For every £100 of income above £50,000, 1% of the Child Benefit amount needs to be paid as a ‘High Income Child Benefit Charge’ via a self-assessment tax return. You can work out how much tax will become due by using the Government’s calculator: https://www.gov.uk/child-benefit-tax-calculator/main
What happens if you opt not to receive Child Benefit?
You could choose not to receive the Child Benefit, thereby avoiding the payment of extra tax, however, you are encouraged to complete the Child Benefit claim form in any event, as this will mean you continue to accrue National Insurance (NI) credits. This is particularly important to those who have stopped working to look after children, as the amount of State Pension you’ll receive is dependent on your (NI) record, for which 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. Essentially, this means 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.
Using salary sacrifice to reduce your tax liability
There is a way to avoid the extra tax, which means 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.
Contributing to a pension to reduce your income
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% with 20% of the payment being reclaimed via self-assessment.
Pension contribution 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% 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.
Our expert accountants are on hand to help you – why not book in a free consultation with one of our team to discuss your situation? Our financial services are available nationwide, including: Accrington, Bamber Bridge, Buckshaw Village, Blackburn, Burnley, Chorley, Colne, Clitheroe, Darwen, Hurst Green, Lancaster, Lostock Hall, Longridge, Leyland, Penwortham, Preston, Skipton and the surrounding areas.
