From 7 January 2013, if a taxpayer or their partner has income of £50,000 or more and receives Child Benefit then they will be affected. For the nuclear family with 2 children, £1,752 annual tax free benefit will be lost where a working parent’s earnings are over £60,000 (the equivalent of almost £3,000 gross salary) – see technical note below.
Without careful planning, affected parents will suffer a reduction in their net income, forcing cuts to be made in their budget. By using the tax system to their advantage, parents can address this problem face on.
As HMRC will calculate the benefit based on adjusted net income, parents should consider using childcare vouchers, increasing pension contributions, participating in salary sacrifice for the employed, or where self-employed structuring their income appropriately. These options can lower the taxable income, and therefore reclaim any lost child benefit payment.
Simon Bonnett, Head of Wealth Management at Fiducia Wealth notes: ‘Understanding the way tax is calculated allows a parent to use wholly legitimate methods to regain child benefit that would otherwise be lost. The key point is to use these methods, and ensure the Self-Assessment form is completed correctly (i.e. put gross personal pension payments to a Stakeholder in the relevant box)’.
Individuals who wish to recover Child Benefit should act now, by talking to their employers and taking advice from professional advisers, such as accountants and financial planners.
Tax reduction: Individuals earning between £50,000 and £60,000 a year will suffer tax on their child benefit at a rate of 1% for every £100 of their income over £50,000; so Child Benefit removed entirely from £60,000 onwards.
Child Benefit: £1,055.60 a year for the first child; £696.80 a year for each additional. Payment net of tax.
Tax collected: Tax for 2012/13 will not be payable until 2013/14, collected through self assessment or PAYE
Adjusted net income: Genrally, taxable income. But certain deductions, such as the gross value of personal pension contributions, gift aid and trading losses, are allowed