Shelter child benefit from tax authorities
That’s understandable, especially as child benefit is not withdrawn but continues to be paid, instead being clawed back in extra tax.
Which is how so many people get caught out.
Child benefit is currently worth £20.70 a week for the eldest, then £13.70 a week for each additional infant.
But under the Government’s High Income Child Benefit Charge (HICBC), which was introduced in 2013 and affects around 1.1 million families, you start losing part of it if either you or your partner have an “adjusted net income” of more than £50,000.
Adjusted net income is your total taxable income – the likes of your basic salary plus benefits, rental income, share dividends and so on – minus things such as pension contributions and gift-aided donations to charity.
The tax is one per cent of the amount of child benefit for each £100 of income on a sliding scale between £50,000 and £60,000. For those earning more than £60,000 the charge is 100 per cent – in effect, they receive no child benefit.
So what you need to do is try to get your adjusted net income back to £50,000. How to do that? Any contributions made into a company or personal pension scheme will reduce the final amount of adjusted net income.
Royal London gives the following example.
Tony has a taxable income of £58,000 and his wife Lucy has no income. They have two children which results in Lucy receiving child benefit of £1,788.80 p.a.
Since Tony’s income is £8,000 over the limit, he’ll face a tax charge of 80 per cent of £1,788.80 = £1,431.04.
As a couple, the overall value of the child benefit has therefore been reduced to £357.76 (£1,788.80 - £1,431.04).
But if Tony makes net contributions totalling £6,400 in the tax year to a personal pension plan, this will be grossed up to £8,000. This means that his adjusted net income falls to £50,000 and no charge is payable.
By contributing £6,400, he’s saved £1,431.04.
Assuming 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 per cent of £8,000) through his tax return.
Alternatively, you could achieve the same result by paying additional voluntary contributions (AVCs) into your occupational scheme.
What then of childcare vouchers?
You can reduce your adjusted net income by opting to have some of your salary paid in the form of these vouchers if your employer offers such a scheme.
You can take up to £55 a week of your wages as vouchers, on which you do not pay tax or national insurance.
Be warned though – from October 4, workplace childcare voucher schemes will close to new applicants.
Unfortunately, you may be too late as many employers will require a month’s notice to start the deductions from your payslip. Worth contacting your payroll department ASAP to find out. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners, based in Solihull. Email: email@example.com The views expressed in this article should not be construed as financial advice