Thousands of families are failing to take advantage of a little-known quirk in the tax rules which means that paying more into your pension would allow you to reclaim any child benefit entitlement that may previously have been lost. This is a win-win situation.
Steve Webb, former pension’s minister, says large numbers of families where one parent earns more than £50,000 a year are “unnecessarily” losing out on child benefit. This “lost” cash could quite easily run into tens of millions of pounds a year.
It relates to the government’s high-income child benefit charge, where the benefit is clawed back via the tax system if either you or your partner have an “adjusted net income” of more than £50,000.
The change took effect in 2013 and has meant many thousands of people have lost some or all of the benefit, currently worth £1,788.80 a year for a family with two children (you get £20.70 a week for the eldest/only child, then £13.70 a week for each additional child).
The tax is 1% 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% – in effect you receive no child benefit.
Here at SMC Financial Services we regularly highlight available tax savings such as the connection between the child benefit tax charge and pension contributions. We come across a lot of people who may not realise that putting more money aside for retirement can push down your tax liability, which also means you effectively keep more of your child benefit.
What you might think of as an income of £50,000 a year isn’t the same as the taxman’s definition. The child benefit tax charge is based on your adjusted net income. This is your total taxable income (i.e, basic salary plus any benefits from your job such as a company car or private medical insurance, plus share dividend or rental income etc), minus things such as pension contributions and gift aided donations to charity.
Contributing to your pension plan is an acceptable way of getting your adjusted net income below the vital £50,000. Even Citizens Advice features on its website: “Pension contributions are taken out of your income before you pay tax. This could, therefore, reduce the amount of income on which you have to pay tax to below the £50,000 limit.”
Any pension contributions made by an individual, whether it’s an occupational scheme or a personal pension, will reduce the final amount of adjusted net income. For example, you could pay additional voluntary contributions into your occupational scheme. With some employers, for every £1 you pay in AVCs the company will pay an extra 50p or even £1.
There are also several other ways of reducing your adjusted net income:
• Consider using “salary sacrifice” and opt to have some of your salary paid in the form of childcare vouchers. “These are also taken out of your income before you pay tax, so your taxable income will also reduce.
• Increase your charitable giving. When calculating your adjusted net income, if you made a gift aid donation during the relevant period you take off the grossed-up amount – ie, what you donated plus the basic rate of tax. So for every £1 of gift aid donations you made, take £1.25 from your net income.
If you feel you may benefit from discussing anything we have mentioned above, please do not hesitate to get in touch.