Child Benefit can be paid to everyone in the UK who has children, but if you’re a higher-income family, you’ll have to pay extra tax called a High Income Tax Charge, if you choose to keep getting it. The extra tax you pay will effectively cancel out some or all of your Child Benefit.
You’ll have to pay more tax if either you or your partner have an income over £50,000 a year depending on how much income you’ve got, but you’ll still continue to receive the same amount of Child Benefit. If your income is over £60,000 a year, you’ll pay so much more in tax that it will cancel out all of the Child benefit you get.
Is it just mine or do both our incomes get taken into consideration?
It’s the income of each partner in the household that counts. Your combined income won’t be taken into account, This means that if one of you has an income of over £50,000, you’ll be affected by the changes, even if the other partner doesn’t have any income at all.
However, if both you and your partner have an income just below the £50,000 limit, you’ll still continue to receive the full amount of Child Benefit and won’t have to pay any extra tax. If both and your partner have an income over £50,000, whoever has the higher income will have to pay the extra tax.
How can I be smarter about it?
What’s your ANI?
The income figure used to test against the £50,000 child benefit tax charge threshold is the same one used to assess entitlement to the personal allowance and the age-related element of the personal allowance and is known as ‘adjusted net income’ or ANI for short. ANI is calculated as follows:
– Total taxable income from employment, including any company benefits (add back any tax relief given for payments to trade unions or police organisations)
– Taxable profits from self-employment
– Interest, dividends and rental income received (gross values)
– Any pensions received (including state pensions) and taxable social security benefit.
Deduct all the following:
– Pension contributions
– Gross value
– Trading losses
– Grossed-up amount of gift aid payments (grossed up by basic rate tax)
The personal allowance should NOT be deducted in arriving at ANI.
If the net amount is below £50,000 then no child benefit tax charge is payable.
What are my options to keep receiving the child benefit?
1. Salary Sacrifice
If your employer runs a salary sacrifice scheme, you can use it to replace taxable earnings with non-taxable benefits, such as childcare vouchers. Alternatively, you could ask your employer to reduce your salary but make up the difference in your workplace pension scheme.
This could reduce your salary to less than £50,000, entitling you to full child benefit.
2. Pension contributions
If you earn £55,000 and make £5,000 of pension contributions, you will decrease your taxable income to £50,000. This means you will be eligible for the full child benefit and have more money saved for when you retire. Paying money into a pension means you also benefit from a reduced income tax bill. You cannot normally access the funds before you reach 55, however.
3. Transfer assets
You can transfer savings and investments to your spouse or partner if they earn less than you in order to reduce your taxable income.
4. Review your spending
If you can’t bring your income below the £50,000 threshold, think about what you can do to offset the impact of losing the child benefit. Check your household bills, look at where you can save money, maximise usage of your Isa allowance – little things like that can all help to recoup what you lose through the child benefit tax.
5. Become a company
A radical solution would be to start your own company, which would enable you to pay yourself a lower wage below the tax threshold and then declare and pocket dividends from your company shares.
Incorporating as a company isn’t possible for most employees, as an anti-avoidance rule called IR35 exists to prevent “disguised employment”, where someone is employed but in tax terms is self-employed.
But if you are a consultant or self-employed, you could go to an accountant to see if this is a viable option for you.