Child benefit cuts: don
- 7 January 2013
Child benefit changes could affect 1.1 million families in the UK, but there are ways of making sure you don’t get hit with the new tax charge, writes personal finance and parenting journalist Samantha Soames.
A letter from Her Majesty’s Revenue and Customs (HMRC) is rarely a welcome occasion and none more so than for the 1.1 million plus taxpayers who’ve just been told their child benefit payments are to be cut.
Anyone earning over £50,000 a year will have been sent the letter, which signals the end to a universal credit paid out regardless of income or circumstance.
From 7 January 2013 child benefit will be means tested in an overhaul which the government claims will save taxpayers an estimated £1.5bn.
At the moment households with children receive child benefit of £20.30 a week or £1,055.60 a year, for the oldest child and £13.40 a week, or £696.80 a year, for each subsequent younger sibling.
Child benefit cuts – who wins?
Controversially the changes do not distinguish between single-income and double-income families, meaning a single parent on £60,000 a year will lose all child benefit, while a couple earning £50,000 or less each will keep every penny of it.
This is a fact not lost on the Guardian’s child benefit Passnotesblog.
and who loses…
If you are earning over £50,000 child benefit is clawed back incrementally via a tax charge.
Danny Cox, an adviser with Hargreaves Lansdown explained: “For every £100 over the £50,000 threshold you earn, 1% of your child benefit will be taken back via your tax return, effectively the money clawed back is a tax charge. This means if you earn £55,000, 50% of your child benefit will be clawed back. And if you earn over £60,000, the benefit will be wiped out altogether.”
Child benefit cut: it’s not just about your salary
So a couple with two middle earners, one on £45,000 and another on £48,000, will actually be better off than a single income family with one earner on £51,000 a year.
But in many households salary is not the only means of income. Matthew Stephens at the Prudential, says many taxpayers on less than £50,000 per year will also be affected by child benefit changes.
He said: “The definition on which the tax charge is based is not just earnings but adjusted net income. So someone earning £35,000 but with rental income of £10,000 and investments producing income of £10,000 will find their child benefit clawed back.
He said: “It's also important for people to remember that bonuses and benefits in kind count too, so people might have a low base salary, a good bonus and benefits in kind and be affected.”
Additional income that affects child benefit payments:
· Benefits in kind, including a car allowance and bonuses.
· Investment income, including rental income.
· Savings income including chargeable gains -the profit made for example bond gains.
· Any other income – such as an inheritance
Boost your child benefit and boosting your pension
As eligibility for child benefit is measured against your taxable income you need to find a way to lower it.
Cox said there are three ways you can do this, and you can start now as the changes are taking place in the current tax year.
· Charitable donations
· Childcare vouchers
· Pension contributions.
Of all these increasing your pension if you can, makes the most sense.
If you have a sole earner in household with one child, with an annual salary of £55,000 the child benefit of £1,055.60 will attract a tax charge of £527.80.
Cox said: “But by making £5,000 of pension contributions, you can effectively decrease your taxable income
“This means you could still be eligible for the full child benefit of £1,055.60 a year and you will have invested in your pension.”
And because of the tax benefits pensions enjoy, the £5,000 pension contribution could cost as little as £3,000 due to tax relief.
Spend more on childcare
Childcare vouchers are usually offered by an employer as a benefit to staff in the form of a salary sacrifice where you convert part of your salary into vouchers.
The vouchers actually reduce the parent’s taxable income.
Iain McMath, managing director of Sodexo Motivation Solutions says: “Basic rate tax payers claiming childcare vouchers for the first time can exchange up to £55 of their salary a week for vouchers.”
Taking the full £55 a week of childcare vouchers could reduce a parent’s taxable income by £2,916 a year, which could even put a parent back in the basic rate tax payer bracket.
McMath said: “This is because tax-exempt benefits like childcare vouchers are excluded from the tax rate assessment. So, for the purpose of childcare vouchers, you can earn up to £42,475 a year before being classed as a higher rate tax payer.
"Even if parents don’t have a need for childcare right now, parents can still purchase vouchers now and use them at a later date, thereby allowing them to keep claiming child benefit."
Finally by using gift aid to donate the charity you can reduce the amount of your income used to calculate any clawback. So, for example, if you earn £60,000 and make a payment of £4,000 to charity, then that is calculated as a gross payment of £5,000 including basic rate tax that goes to the charity. The adjusted income is now £55,000 not £60,000 and you would lose only 50 per cent of the child benefit received.
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