22nd June 2015
Millions of middle-income families could be hit financially if the Child Benefit tax threshold is cut in the upcoming emergency Budget, NFU Mutual has warned.
The group has cautioned that the Chancellor George Osborne could reduce the cap to bring it into line with higher rate income tax when he unveils his Budget in July.
Stephen Berry, chartered financial planner at NFU Mutual, said: “We already expect that by 2020, any parent paying 40% income tax and receiving Child Benefit will likely face a Child Benefit tax charge.
“Child Benefit is reclaimed, in part or in full, from family breadwinners with incomes over £50,000. The 40% tax rate will also kick in at £50,000 by 2020.”
The organisation fears that the Osborne could be tempted into reduce the threshold for the tax charge now rather than wait for the starting point of higher rate tax to catch up.
“Over the course of the Parliament, both would then rise to meet the £50,000 mark,” added Berry.
“The starting point for the 40p rate is scheduled to rise by an average £1,500 a year, from £42,385 today to £50,000 by 2020. If the threshold for the tax charge is brought down next April to match 40% tax levels, it could mean parents earning £44,000 or more have to give some or all of their Child Benefit back to the taxman.”
If that does happen, those earning £54,000 or more would lose Child Benefit entirely.
But Berry advised that astute higher-earning families should still be able to keep much, if not all, of their Child Benefit by putting money into a pension to reduce their taxable income. The higher rate tax relief on these pension contributions, coupled with reducing or eliminating the tax charge, make them very financially efficient.
Berry said: “We’ve already seen many unsuspecting people caught out by the tax charge as some partners don’t discuss their income with each other. Higher earners moving in with a partner can also trigger a tax charge if there are children involved.
“Simple planning measures can reduce potential bills. With the help of a professional, families can make sure they are making the most of their money and aren’t paying any more tax than they have to.”