CURRENTLY every family with children aged under 16 (up to 18 if they are in full-time education) is eligible for Child Benefit regardless of earnings. Families with one child receive £20.30 a week, with the rate being £13.40 a week for any other children.
The original plan announced in 2011 was for child benefit to be withdrawn in full from all higher rate tax payers. Due to the criticism of this being unfair on single income families and introducing a benefit “cliff edge” for individuals with income just over the higher tax rate threshold, the rules were amended in the Budget. It’s estimated that these changes will see around 750,000 families keep some or all of their child benefit payments.
Importantly, however, even if you are affected by the changes, there are potential planning opportunities available that could mean you retain some or all of the Child Benefit available.
How will the new rules work? To put it simply, if both you and your partner’s individual adjusted net incomes are under £50,000 a year you will keep all of your child benefit entitlement. If either you or your partner’s income is over £60,000 you will lose child benefit in full.
However, if you or your partner’s income is between £50,000 and £60,000 you will effectively lose 1% of your child benefit payments for every £100 your income is above the £50,000 threshold – so for example if you earn £55,000 you will lose 50% of your child benefit.
Treasury Minister David Gauke admitted in a recent Parliamentary interview that, following the changes, a parent with one child earning £60,000 could effectively pay 53p in every pound they earned over £50,000. This would rise to an effective 73p for every pound if they had four children.
What counts as income? Many commentators have “stated earnings” or “income”, but the correct basis is adjusted net income. Although the calculation has prescribed steps, broadly your adjusted net income is your gross taxable income (including earnings, interest and dividends) less specific deductions such as the gross amount of any pension contributions and gift aid payments.
Will my Child Benefit payments stop? The government has announced it will write to all those set to be affected by the change in the autumn of 2012, with details of how much they’ll lose. However, the practicalities of how this will be administered mean that affected individuals will continue to receive the benefit in full even if their income is over £60,000 – the Government will then take the equivalent value back off the element you are not eligible for through an additional Income Tax charge.
What if I’m separated from my partner? If your ex-partner earns over £50,000 but you receive child benefit for your children you will be permitted to keep the payments in full (providing you earn under the £50,000 threshold). Equally if you earn over £50,000 but have separated from a partner who claims child benefit for your children you will not have to pay the additional Income Tax charge.
Can I decide to stop my child benefit payments? Yes you can, but you should still complete a child benefit application if you have any more children, even if you don’t want to claim child benefit for them. This is because your child benefit entitlement affects whether you qualify for National Insurance credits and could affect whether you will be able to claim a full state pension.
What if I or my partner earns over £50,000? Is there any way to avoid the Income Tax charge and keep child benefit payments? The key to this is your adjusted net income. All may not be lost as there are methods of reducing your adjusted net income through careful planning. Some of these are outlined below.
Making additional contributions into any qualifying pension will reduce your “income” by the gross amount (i.e. the amount including the tax relief)
Salary sacrifice is where you “give up” part of your employment income and the employer uses this money towards a qualifying expenditure i.e. pension contributions, child care vouchers or cycle to work scheme, to name a few. The additional benefit is that you will also save national insurance. The main downside though is that because your salary is effectively reduced this could affect the amount of mortgage you can obtain and it could also reduce your entitlement to certain benefits, such as a lump sum payable on death if this is expressed as a multiple of your salary.
Income arising from tax-efficient investments, such as ISAs will not count towards the adjusted net income figure so there may be an advantage in sheltering capital within these types of products.
Other investments, such as Investment Bonds are technically “non-income producing” assets so as long as any withdrawals you take fall within the (cumulative) 5% annual allowance these amounts will not count towards the adjusted net income calculation either.
Of course, any investment carries risks and therefore seeking professional financial advice is absolutely essential.
Transfer assets to a spouse/partner
Moving income producing assets into your lower earning spouse or partner’s name can also be a way of reducing your ‘adjusted net income’ in order to reduce or eliminate any income tax charge. However, there could be costs (e.g. Capital Gains Tax or Income Tax charges) and you should consult us for advice before re-arranging ownership of any of your assets or investments.
Whilst this article hopefully clarifies the recent changes, you need be aware that this is an overview of some of the considerations and further discussion with an appropriate expert is highly recommended to ensure any action you take is pertinent to your personal circumstances. So, should you require assistance please do not hesitate to contact us and we will be happy to help.
Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.
The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.