Could you ben­e­fit from pen­sions child ben­e­fit tax plan­ning trick?

We ex­plain the sim­ple method to beat the sys­tem

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While there might be no such thing as a free lunch, by un­der­stand­ing the tax sys­tem there are sim­ple ways to boost your wealth.

If you have young chil­dren and earn be­tween £50,000 and £60,000, there’s a lit­tle known – and per­fectly le­git­i­mate – bit of tax plan­ning you can use to save hun­dreds of pounds a year.

Child ben­e­fit is paid at £20.70 per week for the first child and £13.70 per child there­after – so two par­ents with two kids could be el­i­gi­ble for £1,788.80 a year.

How­ever, since 2013 work­ing fam­i­lies where one par­ent earns more than £50,000 a year have been levied with a ‘High In­come Child Ben­e­fit Charge’.

This tax op­er­ates on a slid­ing scale so that for ev­ery £100 earned above the £50,000 thresh­old a 1% charge is levied on any child ben­e­fits. Where some­one in the fam­ily is earn­ing over £60,000 the charge wipes out the en­tire child ben­e­fit en­ti­tle­ment.

HOW TO BEAT THE SYS­TEM

Those are the ba­sics, now here’s the trick. When the HMRC, aka the Gov­ern­ment tax of­fice, mea­sures earn­ings for the pur­poses of the child ben­e­fit

IF YOU ARE EARN­ING BE­TWEEN £50,000 AND £60,000 IT COULD MAKE SENSE TO IN­CREASE THE AMOUNT YOU PAY INTO YOUR PEN­SION IN OR­DER TO DE­CREASE THE TAX CHARGE LEVIED ON YOUR CHILD BEN­E­FIT PAY­MENTS

tax charge, it looks at in­come net of (or ex­clud­ing) pen­sion con­tri­bu­tions.

That means if you are earn­ing be­tween £50,000 and £60,000 it could make sense to in­crease the amount you pay into your pen­sion in or­der to de­crease the tax charge levied on your child ben­e­fit pay­ments.

HOW IT WORKS IN PRAC­TICE

Let’s say a fam­ily of four has two chil­dren el­i­gi­ble for child ben­e­fit, but one of the par­ents earns £55,000. They are hit with a tax charge of £894.40 which is half the value of the child ben­e­fit they re­ceived.

How­ever, if the par­ent earn­ing £55,000 in­stead paid £5,000 into their pen­sion, they wouldn’t have to pay the child ben­e­fit tax charge be­cause their net in­come would fall to £50,000.

Fur­ther­more, as a higher rate tax­payer they’d be able to claim pen­sion tax re­lief at the 40% rate, worth a tidy £2,500 on the £5,000 con­tri­bu­tion.

It’s worth re­mem­ber­ing that if you’re over 55 and have al­ready ac­cessed your pen­sion flex­i­bly, your an­nual al­lowance – the amount you can save in a pen­sion each year tax-free – drops from £40,000 to £4,000.

When you com­bine that ex­tra tax re­lief boost with child ben­e­fit charge sav­ing, flip­ping the £5,000 of in­come into pen­sion has added £3,394.40 to the fam­ily’s over­all wealth.

Royal Lon­don, the in­surer, reck­ons 320,000 fam­i­lies could ben­e­fit by pay­ing salary into a pen­sion to re­duce their child ben­e­fit tax bill, po­ten­tially sav­ing a com­bined £171m.

Tom Selby, Se­nior an­a­lyst, AJ Bell

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