According to government data, a relatively small number of UK taxpayers (14%) are lucky enough to have total income over £50,000, the point at which the High Income Child Benefit Charge becomes payable.
But everyone’s circumstances are different, and in a rigid benefit system, it’s worth knowing your rights.
New calculations by interactive investor reveal that parents earning over £50,000 could avoid paying the High-Income Child Benefit charge and save 59% in tax by topping up their pension.
Child benefit, worth £21.80 per week (over £1,100 a year) for the first child and £14.45 a week (over £751 a year) for each subsequent one at present, was a universal payment to families with children until January 2013. Since then, taxpayers with adjusted income of over £50,000 a year are required to pay back some or all of their child benefit under the High Income Child Benefit charge.
As it only applies to the higher earner in a couple, another example could see both partners earn £49,000 and keep all their child benefit, whereas a couple where one person earns above £50,000 will start to lose their child benefit.
Adjusted net income is total taxable income minus certain tax reliefs, for example pension contributions.
This means that a parent earning £52,000 who is already paying 5% of their income (£2,600) into their workplace pension using a net pay scheme would automatically see their taxable income fall to £49,400, and thus avoid the High Income Child Benefit charge.
A parent earning £53,000 paying 5% of their income (£2,650) into their workplace pension could contribute an additional £350 to their pension to bring their taxable income down to £50,000 (£2,650 minus £350).
In this scenario, parents with two children could potentially save a total of £566 in child benefit, with net cost of top up pension contribution of £198 (pension contribution £350, tax saved £86, child benefit saved £66). When factoring the pension tax relief and the Child Benefit savings, the pension contribution is effectively boosted by 77%.
For parents with one child, the child benefit savings would be £340 with a net cost of pension contributions of £224. Here, the pension contribution is boosted by 56%
Similarly, a parent earning £54,000 who is already paying 5% of their income (£2,700) to their workplace pension through could contribution a further £1,300 to keep their adjusted net income at £50,000.
Here, parents with two children could potentially save a total of £754 in child benefit with a net cost of pension contribution of £589, and the pension contribution is boosted by 121%.
For parents with one child, the child benefit savings would be £453 with a higher net cost of pension contributions of £687. Here, the pension contribution is boosted by 89%
Alice Guy, Personal Finance Expert, interactive investor, says: “People earning between £50,000 to £60,000 have a shocking 61% tax rate if they have two children. That’s because they pay 42% (40% income tax and 2% national insurance) and they lose a further 19% of their pay through the high-income child benefit charge.
“Those with private pensions could save more by making additional contributions through tax rebates. If you have kids and earn between £50,000 to £60,000, making a pension contribution could save you 59% tax (40% tax plus 19% child benefit for earning between £50-£60k). A £100 private pension contribution (which becomes £125 after pension tax relief) will save you £74 in tax. £25 tax relief is added automatically to your pension, another £25 is due through a tax rebate at the end of the year and you save £24 in child benefit payments. Or put another way, it only costs you £51 (£100 minus £25 tax rebate, minus £24 child benefit) to add £125 to your private pension.
“Don’t forget that to get a tax rebate for private pension contributions you need to write to HMRC if you’re a higher rate taxpayer and you don’t do a tax return. Many higher rate taxpayers are paying too much tax because only basic rate pension tax relief of 20% is added automatically to private pension payments. They’ll need to claim the additional 20% through their tax return or by writing to HMRC.”
Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The existing downright baffling rules which leaves child benefit payments out of reach if just one parent earns above the £50,000 threshold but does not apply if both parents earn just below the threshold – or if one partner doesn’t work at all. While a £50,000 annual salary is well over the national average, everyone’s circumstances are different, so it’s worth knowing your rights. Some people might also find it a source of contention that the £50,000 threshold hasn’t risen in line with earnings, especially giving the rise to the cost of living which has put extra pressure on household budgets.
“But parents paying the High-Income Child Benefit Charge may not know that they could claw back some, if not all, of their child benefit through pension contributions. Parents earning £52,000 paying 5% into their workplace pension will automatically avoid the High Income Child Benefit charge.
“In our scenario of a parent earning £53,000 could save £566 in child benefit due to their pension contributions. Contributing an extra £350 on top of their normal 5% contribution would only cost £198 after tax and child benefit saved, giving an immediate boost of 77%, which in turn, would be turbocharged by the magic of compounding over the years.”