Although we are some way off the end of the tax year, it is worth reviewing one’s financial affairs now in order to ensure tax liabilities are mitigated.
This is especially the case for those affected by the taxation of Child Benefit.
The benefit became taxable, from January 7, 2013, where a recipient or their partner had income over £50,000 in a tax year.
For this purpose, income is the total income subject to income tax, including salary, benefits and bonuses, profits from self-employment, pensions, rental income, bank interest and dividends. In other words, all income before tax.
For those that might be affected, do not forget that payments to pension schemes and charitable Gift Aid donations can be deducted from that income.
The tax charge applies at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. At £60,000, the whole benefit is clawed back.
Where both partners have net income in excess of £50,000 the charge will apply to the partner with the higher income.
For married couples, the transfer of assets between them is free of all taxes.
Where one is a high earner and one is not, it may be beneficial to review the ownership of income producing assets to see if transfers between them can reduce income below the £50,000 threshold so that the full Child Benefit award is retained and at the same time mitigating higher rate tax liabilities on the transferring spouse.
Alternatively, the payment of a pre-April 6, 2014, pension contribution should be considered to reduce income below the £50,000 threshold, thus ensuring the benefit is received in full as well as gaining higher rate tax relief on the contribution paid.
Gift Aid donations can also be useful in reducing the impact of any Child Benefit tax and, where these are paid by both spouses, it would be sensible for the charity donations to be made by the spouse with the higher income to obtain the optimum relief for these payments.
Any liability to the Child Benefit tax will be collected through an individual’s Self-Assessment Tax Return.
For those who do not normally complete a return, they will need to do so and register with HM Revenue & Customs.
For the 2012/13 tax year, the registration date is October 5, 2013, in order to meet the filing and payment deadline of January 31, 2014.
Interest and penalties can be levied for late registration and/or filing and payment.
Individuals will be able to elect not to receive Child Benefit if their income exceeds £60,000.
Child Benefit payments can be re-started if they or their partner’s income falls below £60,000.
