How to rebalance your household budget after the knock of the child benefit tax charge0
Child benefit is available for all children under the age of 16, or until they are 20 if they enter ‘non-advanced’ education. It is worth £20.30 per week for your firstborn and £13.40 for every other offspring. That adds up to a substantial part of a family’s overall budget, even when the main earner is on a yearly salary of £50,000 or more. The effects of the year old child benefit tax charge are only just starting to become realities for many of these families.
When does the child benefit tax charge apply?
In any household, if the highest earner is on a wage of £50,000 or more, then their child benefit amount is taxed. Once the £60,000 salary amount is reached, this tax is 100% of the actual amount, thereby cancelling it out entirely.
Obviously, if you have been in touch with HMRC to stop child benefit payments, then there is none of this tax to pay.
Adjusted Net Income
Your Adjusted Net Income (or, ANI, as ‘she’ is known!) is an important figure to be aware of as it is used to determine a couple of your allowances;
- If you are eligible to pay the child benefit tax charge
- Your Personal Allowance entitlement
- The age-related part of your personal allowance amount
It is a calculation involving the addition of particular income types and the subtraction of other financial variables. If the total is less than £50,000 then you do not need to pay the child benefit tax charge.
Add up
- Gross interest, dividends and rental income
- Pensions and state benefits that are taxable
- Taxable profits, for the self-employed
- The sum of your total taxable income from employment. This includes any benefits and the tax relief you may have received for Union Fees.
Subtract
- Gross value
- Any contributions made into a pension
- Any trading losses
- Gift aid payments, ‘grossed up’ total
The personal allowance amount is not a deduction in this ANI calculation.
When to opt out of child benefit
If one parent is earns over £60,000 with no intention of decreasing or shuffling it, and the other parent makes their own National Insurance contributions which count towards a state pension, then you may as well opt out of child benefit.
How do I stop getting child benefit?
You just need to ask HMRC to stop paying your child benefit. This means that the higher income parent will stop being taxed on payments up to this point and you still need to file a self-assessment tax return.
When to continue receiving child benefit
If the non-high earning parent does not have any of their own income, then it is worth keeping your child benefit payments going because it gives you National Insurance credits towards your state pension.
What can I do to minimise the effect of the child benefit tax charge?
There are a few ways that you can minimise the effect of the child benefit tax charge by manipulating your finances.
Shuffle your assets
- Income from investments
As the gross value of your investments is included in your taxable income, it could make sense to transfer ownership into the name of the parent earning the smallest income. This simple adjustment could bring the higher earning parent back to the £50,000 mark, therefore eliminating the tax charge altogether.
- Limited company
If you bring your combined company benefits, dividends and salary under £50,000, then you avoid the tax charge. This money can be kept in the company account until your children have grown up.
You also have the option of your civil partner or spouse becoming a company employee. At this point you could pay them a salary for doing part of your job and decrease your salary accordingly to below £50,000. This keeps the same household income overall, but removes the circumstances in which you would be paying this tax.
Pension Contributions
If you were to make a grossed up pension contribution, then your ANI would be reduced and therefore there may be no application of the child credit tax charge.
For example;
ANI before a pension contribution = £60,000
Pension contribution = £8,000
Grossed up pension contribution = £10,000
ANI after pension contribution = £60,000 – £10,000 = £50,000
This gets rid of the charge and puts you in the 40% tax relief bracket on your pension contribution.
Personal contributions to a registered pension can be made if;
- You are carrying forward annual pension allowance from the last 3 years that you haven’t used.
- You have enough earnings, through self-employment or employment.
- You haven’t used the pension annual allowance during the present tax year. In 2014-15, this amount is £40,000.
If the lowest earning parent has a pension, this money could be transferred into the higher earner’s account as another way of increasing their amount.
‘Salary Sacrifice’
This is an agreement with your employer that you receive an agreed amount less take home pay, with the equivalent sum paid into a pension scheme as an employer contribution.
This saves you the child benefit tax charge and a 2% National Insurance saving on amounts over the first £797 per week. The employer saves 13.8% on National Insurance contributions, which they have the option to pass on to you as extra in your pension pot.
Remember;
- Do the maths! There is no point getting round the child benefit tax charge if you lose out on 40% of your pension benefits. Make sure you do not end up with the higher rate income tax on you pension lump sum or pension income.
- Watch out for the lifetime allowance limit. For tax payers without protection, this is down to £1.25 million as of April 2014.
Charitable Gifts
If you were already going to donate cash to a charity then this may be a sensible option. Gift aid payments on cash donations the net amount of basic rate tax, so they must be grossed up before they become a deduction from your income. Also, any charitable contribution of property or investment holdings is completely deductible from your ANI figure for these purposes.
You might prefer to consider that you are giving the child benefit tax charge to your chosen charity, rather than back into the Treasury’s vaults.
So, if you are feeling the absence of your full child benefit allowance, have a think about these possible options and pick the one that best suits your financial situation. Many people consider it wise to seek professional advice before making any final decisions, but it’s good to have the facts at your fingertips first.
