Families are being reminded of ways they can limit or avoid the high income child benefit charge that could leave them up to £2,449 a year better off.
The high income child benefit charge, introduced in January 2013, affects more than one million families.
A family with two children could see their annual income drop by up to £1,752 in 2013/14, while those with three children could lose £2,449.
Under the system, child benefit payments continue to be paid in full but they are clawed back by way of a tax charge if a person, or their partner, earns more than £50,000 a year individually.
Below Which? has highlighted some of the ways savings and investments company Standard Life has identified that people may be able to limit the amount of tax they will have to pay in the 2013/14 tax year on their child benefits, as long as they carry them out before 6 April.
Before making a decision, call our team of experts on the Which? Money Helpline to discuss your options.
With the agreement of the employer, an employee can reduce their contractual income in return for an equivalent employer payment to their pension – this is called salary sacrifice. In addition to tax savings, the employee will also save on National Insurance contributions. And the contribution itself can be increased if the employer agrees to pass its National Insurance saving on to the pension. A contribution by salary sacrifice could mean that a tax return isn’t needed.
Go further: Read our guide to find out more ways to save using salary sacrifice.
Some employers may also offer salary sacrifice for childcare vouchers. This works in a similar way to making a pension contribution through salary sacrifice, although limits apply to the number of vouchers that can be purchased. So be sure to check to see if this is possible first.
Go further: If you are currently receiving childcare tax credits, read our guide to find out if you would be better off with childcare vouchers.
Increase pension contributions
Making an individual pension contribution to reduce income below £50,000 would wipe out the high income child benefit charge altogether. By doing this, an individual would also benefit from higher rate tax relief on their contribution.
If somebody can’t afford to make a contribution that reduces income to the £50,000 threshold, then any contribution reducing income to below £60,000 could still result in a surplus of child benefit over the tax charge. The individual would still have to complete a tax return, though.
Go further: Read our guide to find out more about company pensions and how they work.
Adjust pension contributions
Where both partners are making a pension contribution, consider upping the highest earner’s contributions and reducing the lower earner’s as this could result in the child benefit tax being saved, while higher rate tax relief can be claimed on the extra contribution.
Go further: Read our guide to find out how to top up your pension pot.
If the person being assessed to the tax charge is also the holder of income bearing investments, consider transferring these to the lower earning partner. As the gross value of savings income is included in taxable income, this could make a difference. The transfer has to be a genuine gift, though – you can’t demand the money back if you change your mind.
Go further: Read our guide to find out more about capital gains tax on shares.