Trying to save for your future, while bringing up a family, may seem hard to achieve but there are circumstances where making savings can increase State support for the family.
Child benefit is paid to the parents and guardians of children up to age 16, and children aged 16 to 19 if they stay in approved full time education or training. It is £20.70 per week for the eldest child and £13.70 per week for the younger child.
It is tax free unless the parent or other adult living with the parent has taxable 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 of one of the adults exceeds £60,000. This rule applies regardless of whether the high earner is the parent of the child, whether they are married, civil partners or just living together.
It is especially problematic for those with fluctuating pay, such as the self employed or an employee with irregular hours or significant bonuses. 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.
If one of the adults is not working, not claiming child benefit can also mean a loss of credits for their State pension.
The tax on child benefit can be reduced or even removed, for those with income in this bracket, by making either a pension contribution or charitable donations, both of which have the effect of reducing taxable income.
The following case study shows how this might work.
Anna and John, parents of Amy aged 8, both work. Anna earns £25,000. John 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 £1,078 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 £1,078 and his income net of NI and tax £41,734.48.
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 taxable income will be below the threshold as the £8,000 he pays is grossed up to £10,000 in the pension scheme. So 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 £46,726.
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 54% on his retirement savings.
Where an employer is prepared to match employee payments into a pension scheme the benefits can be even greater as employer pension contributions up to an annual allowance of £40,000 in total are not taxed.
Making charitable gift aid donations also has the same effect of eliminating the tax on the child benefit and relieving the gift at the taxpayer's highest income tax rate.
State Pension Credits
Where one of the parents is not working and so not paying National Insurance, they may also gain credits for the State pension by being in receipt of child benefit for children under age 12. These credits are lost where the child benefit is waived. They can however be restored by completing a CH2 form available from the Department for Work and Pensions website.
Many parents are confused by this form, which is the form required to claim child benefit. To get the State pension credits the claim for child benefit is made on CH2 but then the parent can waive payment of it. It is also important that the claim is made in the name of the non-earning parent or the credits will be wasted.
This may sound complicated, but could make a great deal of difference to the State pension received by the non-working parent so it is worth the effort of completing the form. To get the full State pension 35 years credits must be held.
For other tax saving tips see How to Earn Up to £31,550 from Investments Tax Free
Director of Public Policy, LEBC
LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. All 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. Taxation advice is not regulated by the FCA.Back to News & Views