3rd January 2013
Insurer Prudential has warned that a host of people and not just those earning more than £50,000 could be caught out by the child benefit cuts for higher earners. It has also suggested some ways in which the charge could be mitigated such as using increased pension contributions or gift aid.
Prudential points out that from Monday is it not just those earning £50,000 who could be hit. It says that crucially the definition is not just earnings but ‘adjusted net income’. This means that you could lose some of the benefit when you are receiving rental income or investment income. The Government will also take other ‘remuneration’ such as bonuses and benefits in kind such as car allowances into account.
The definition of adjusted net income is as follows – earnings including benefits in kind and bonuses plus investment income including rental income + savings income + chargeable gains (this is the profit made – for example bond gains).
The insurer says pension contributions can be increased to reduce the figure of adjusted net income. Earnings can be reduced in particular by doing salary sacrifice if the individual is employed. This would then reduce the total adjusted net income. Income from other investments or savings can also be swapped to a non or lower earning spouse.
Prudential retirement expert Matthew Stephens says: “The rules on child benefit give some potentially eye-watering marginal tax rates. For every £100 of income earned between £50,000 and £60,000, 1 per cent of child benefit is lost. For someone who has one child, the annual child benefit is £1,056, meaning that £10.56 is lost for every £100 of income above £50,000. This means an effective rate of income tax of 50.56 per cent on each £100 of income over £50,000.
“The rate increases in line with the more children you have. For four children, it is 71.46 per cent. The good news is that this could effectively be reclaimed by making pension contributions. Someone earning between £50,000 and £60,000 with four children could pay £100 extra into a pension and get 71.46 per cent marginal tax relief – a net cost to the individual of £28.54.”
Prudential has also provided some worked examples set out below.
Family A – Mr and Mrs A have three children. Mrs A receives child benefit of £2,449.20. Mr A has a base salary of £40,000 plus a company car with a benefit in kind value of £5,000 plus a bonus of £10,000. Mr A's adjusted net income is £55,000. Mrs A will still receive the child benefit but Mr A will have to pay a tax charge.
As his adjusted net income falls between £50,000 and £60,000 the tax charge is 1% for every £100 over £50,000.
This means that his tax charge would be 5000/100 = 50% of child benefit received = £1,224 (the figure is rounded down)
Family B – Ms B has two children and receives child benefit of £1,752.40. She earns £34,000 but has inherited various properties which she rents out and these provide annual rental income of £23,000. Her total adjusted net income is £57,000. Ms B tax charge would be 7000/100 = 70% of child benefit received = £1,226
Family C – Mr C has earnings of £25,000. Mrs C has earnings of £35,000. Mr and Mrs C have 4 children and Mrs C receives £3,146 in child benefit. Mrs C inherits a bond which she decides to sell. The profit made is £40,000. This is added onto her earnings which means that her adjusted net income is £75,000. As her adjusted net income is over £60,000, Mrs C will incur a tax charge of £3,146 which effectively wipes out the child benefit received.
Mindful Money view
These are complicated and of course expensive changes. Mindful Money suggests that you may wish to consult with an IFA or accountant to consider all the planning options surrounding the change.There has been a big change in way people pay for advice i.e. pension firms and fund managers can no longer pay commission to an adviser, but if you are serious about mitigating the impact of the benefit changes it may be advisable to consult a professional and arrange to pay a fee. It could definitely be worth your while financially.