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Child Benefit Tax Charge

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Child Benefit: Income Tax Charge for those on Higher Incomes

The recent change to child benefit rules apply to tax payers with income exceeding £50,000 in a tax year and who are in receipt of Child Benefit, and to tax payers with income exceeding £50,000 whose partner is in receipt of Child Benefit.  In the event that both partners have an income exceeding £50,000, the charge will only apply to the partner with the highest income.

For taxpayers with income between £50,000 and £60,000 the amount of the charge will be a proportion of the Child Benefit received.  For taxpayers with income above £60,000 the amount of the charge will equal the amount of the Child Benefit received.  The amount of Child Benefit received will be unaffected by the new tax charge, the measure is a tax aimed at recovering the amount of child benefit paid.

Let’s look at an example:

A parent has an income of £62,000 and two children and receives child benefit of £1,752.  The child benefit tax charge is £1,752 and so wipes out the value of the child benefit.  Instead of paying this tax charge the parent could elect not to receive the benefit.

He / she could make a pension contribution of £9,600 net.  The pension contribution receives tax relief of £2,400 resulting in a gross contribution to their pension of £12,000. Remember this has cost £9,600.

In assessing the Child Benefit Tax charge the gross amount of the pension contribution is deducted from gross income, giving an adjusted net income of £50,000 and so the child benefit can now be received in full without liability to the Child Benefit tax charge.

The net result:

The Child Benefit of £1,752 is received in full.

There is no Child Benefit tax charge.

The pension contribution reduces the income tax charge by an additional £2,400, because further tax relief is given on the pension contribution for higher rate tax-payers.

The net cost of the Pension contribution is:

Gross contribution                                        £ 12,000
Less basic rate tax relief received                £  2,400
Less reduction in 40% tax                             £  2,400
Less amount of child benefit retained           £  1,752

Net cost                                                               £  5,448

As well as providing a valuable benefit in helping people save to provide an income in their retirement and to reduce or remove the Child benefit tax charge, pension contributions can:

-Attract tax relief at the individual’s marginal rate of income tax

-Be used to reclaim lost personal allowances, including age allowances

-Reduce the tax payable on Chargeable Gains from investment bonds

-Reduce the amount of Capital Gains tax payable on the disposal of an asset

 

Tax Relief on individuals’ pension contributions is only available up to 100% or £3,600 whichever is greater, of their Relevant Earnings.

There may be an Annual Allowance charge if contributions exceed the Annual Allowance.

For more information on how pensions might be able to help you, please contact Graham Westhall, Chartered Financial Planner at SWLaw Investment and Financial Planning Ltd.

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