Child Benefit - can you avoid the tax charge?
Do any of your clients earn more than £60,000 and have children eligible for Child Benefit? They could lose all or some of their benefit because of their earnings.
This article explains how to get their Child Benefit back and help them fund for retirement.
Key facts
- Child Benefit is currently:
- Higher rate (for the eldest child) £25.60 a week.
- Lower rate (for each additional child) £16.95 a week.
- Qualifying children are:
- Aged under 16, or
- Aged under 20 and in full-time, non-advanced education or on certain approved vocational training courses.
An income tax charge applies to people who get Child Benefit and whose income (or partner's income) is more than £60,000 in a tax year.
If income is between £60,000 and £80,000, the charge is a proportion of the Child Benefit received. If it's over £80,000, the amount of the charge is the same as the Child Benefit received. We explain below how to reduce or eliminate the charge.
Child Benefit isn't means tested - it's paid tax-free to most people with children, with no requirement to have paid National Insurance contributions at all.
It's important to note that Child Benefit itself isn't being taxed or reduced - it will continue to be paid in full to the claimant.
However, a tax charge will be calculated through a tax return on any partner whose income is more than £60,000 a year. If both partners have incomes over the £60,000 limit, the charge applies to the partner with the higher income. The tax charge will be one percent of the amount of Child Benefit received for every £200 of excess income. This is why the charge is the same as the Child Benefit received by people whose income is more than £80,000 a year. [(£80,000 - £60,000) ÷ £200 = 100%]
What can be done?
The 'income' used by HM Revenue & Customs to calculate the charge is 'adjusted net income' (opens in a new window).
Any pension contributions made by an individual, whether it's a contribution to an occupational pension scheme or to a personal pension, will reduce the final amount of adjusted net income. If this is enough to get it below £60,000, the charge will be avoided; if it ends up between £60,000 and £80,000, the charge will be reduced.
Case study
Tony lives in England and has a taxable income of £68,000 and his wife Lucy has no income. They have two children which results in Lucy receiving Child Benefit of £2,212.60 a year, [(£25.60 + £16.95) x 52].
Since Tony's income is £8,000 over the limit, he'll face a tax charge of 40% of £2,212.60 = £885.04.
As a couple, the overall value of the Child Benefit has therefore been reduced to £1,327.56 (£2,212.60 - £885.04).
If Tony makes net pension contributions totalling £6,400 in the tax year to a personal pension plan, this will be grossed up to £8,000. This means his adjusted net income falls to £60,000 and no charge is payable.
By contributing £6,400, he's saved £885.04. If all of the pension contribution lies in the higher rate tax band, he'll also be able to claim an additional £1,600 in tax relief (20% of £8,000) through his tax return. So, his £8,000 pension contribution has in fact cost him £3,914.96 (£6,400 - £885.04 - £1,600).
Further information
- HMRC Child Benefit (opens in a new window)
- HMRC Child Benefit Income Tax Charge (opens in a new window)
Disclaimer
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.