Child benefit changes – not as simple as A B C
If either you or your partner earn more than £50,000, then you may be about to lose your child benefit thanks to proposed Finance Bill changes.
Although the child benefit will continue to be paid, usually to the mother, HM Revenue & Customs (HMRC) will take the equivalent value back through a special new income tax charge on the higher income partner. The change comes into effect for benefit paid from 7 January 2013, but now is the time to start looking to reduce your income and avoid the tax.
For people with ‘adjusted net income’ over £60,000 the income tax charge will be equal to the full amount of the child benefit payments. For income between £50,000 and £60,000, the tax will equal 1% of your child benefit for every £100 of income above £50,000. So, for example, if your income is £54,000, and your partner’s income is less, you will pay additional tax equal to 40% of the child benefit paid to you or your partner.
Child benefit is £20.30 for first child and £13.40 for subsequent children, so a family with two children is entitled to £1,752.40 before the tax charge, which, in the example above, would reduce the benefit to £1,051.44. The Treasury estimates that 15% of families will lose all or part of their child benefit.
‘Adjusted net income’ is income after deducting the gross amount of your pension payments and donations to charity under gift-aid, so one way of keeping your child benefit may be to make additional payments into your pension scheme. As well as saving child benefit, you will benefit from the basic and higher rate tax relief on the pension payment.
Another way of reducing income if you are an employee is to buy childcare vouchers through salary sacrifice, resulting in no tax and no employee’s national insurance contributions on the amount of salary you give up.
The more control you have over your income, the more options you have. You might be able to transfer investments to your partner so that the income on them becomes theirs and taxable on them. If you are self-employed or carry on business through your own company, you may be able to pay your partner (but you must be able to justify the payment) or control the timing of some of your income to keep it below £50,000.
The only thing clear about the changes is how complex the process of finding a solution can be. Please get in touch with us if you think you may be affected.