Since 2010, Child Benefit, the universal allowance paid to parents, has become taxable where one adult in the family earns more than £50,099. Consequently many families have chosen to forego this once tax free allowance. Some parents may be able to restore this payment by saving in a pension or gifting to charity.
Below is an article that has been written by LEBC Director Kay Ingram for Tax Confidential.
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Trying to save for retirement while bringing up a family may seem hard to achieve but there are circumstances where making an investment in a pension can increase State support for the family.
Child benefit is paid to the parents and guardians of children under age 16 or up to age 20 if still in approved education or training. It is £20.70 per week for the eldest child and £13.70 per week for each younger child. It is a non means tested benefit.
It is tax free unless the parent or other adult living with the parent has adjusted net income of more than £50,099 pa. Those who earn over this figure are required to pay income tax on a slice of the child benefit so that its value is eroded to nil once taxable income exceeds £60,000.
In response to this change many parents have chosen to forego child benefit and no longer claim it. This can however result in unnecessary loss of tax free income. Child benefit also qualifies for NI credits so can count towards your state pension entitlement. It is also problematic for those with fluctuating pay such as the self employed or an employee with irregular hours or significant bonuses.
The tax on child benefit can however be reduced or even removed for those with income in this bracket by making either a pension contributions or charitable donations, both of which have the effect of reducing the adjusted net income.
The following case study shows how this might work.
Anna and John, parents of Amy aged 8, both work. She earns £25,000 per year and he earns £52,000 salary but also fluctuating bonuses, this year he expects to earn £60,000 in total. They have no other taxable income.
Child benefit of £1,076 pa is paid to Anna tax free and she earns less than £50,099 so is not taxed on it. As John earns in excess of this he will be taxed on the child benefit. His extra tax bill will be £1,076 and his income net of NI and tax £41,187.
They have a choice of ceasing to claim child benefit or of completing a tax return each year and paying the extra tax through self assessment. As John's earnings fluctuate he is unsure what to do.
If John pays £8,000 of his income into a pension plan his net adjusted income will be below the threshold as the £8,000 he pays is grossed up to £10,000 in the pension scheme. So his net adjusted income will be £50,000. There will be no tax to pay on the child benefit nor the £10,000 grossed up pension payment and his net income would be £44,263. Adjusted net income is calculated using; total taxable income from all sources reduced by certain tax reliefs, such as personal pension contributions, gift aid donations or trading losses.
So Anna and John can save for their retirement and retain the full child benefit giving them an effective rate of tax relief of over 53.45% on his retirement savings. This is made up of 40% income tax relief and the child benefit of £1,076 is equivalent to 13.45% of the £8,000 he has paid into his pension.
Making charitable gift aid donations also has the same effect of reducing the net adjusted income and eliminating the tax on the child benefit and relieving the gift at the taxpayer's highest income tax rate. Those who are self employed can also use trading losses in the same way to reduce their net adjusted income below the £50,099 threshold.
Director of Public Policy, LEBC
Tax treatment is based on individual circumstances and may be subject to change in the future.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change.
A Pension is a long term investment the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. The Financial Conduct Authority does not regulate tax planning.
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