Before 2013 everyone was entitled to receive Child Benefit no matter how much they earned. Since 7th January 2013 households where someone has adjusted net income of over £50,000 have had their Child Benefit reduced. Those with adjusted net income over £60,000 are no longer eligible at all. The £50,000 threshold hasn't changed since 2013 which means that more and more families will be affected as incomes increase.
If you earn over £50,000 and fail to opt out of the payments, you will have to pay money back through the High Income Child Benefit tax charge on a Self Assessment tax return.
A good and legitimate way to reduce your adjusted net income is to make a personal pension contribution.
Some 500,000 people now have to fill in a tax return purely because of Child Benefit. Parents who don't work or are on a low income should claim Child Benefit to get their National Insurance credits. If their partner earns too much, they should still claim and then opt out of the payments to get the credits. You need 35 years of full National Insurance credits to get the full new State Pension.
What is adjusted net income?
Adjusted net income is your total taxable income before any personal allowances less deductions such as Gift Aid and trading losses (if you're self-employed). Taxable income includes employed income, self-employed income, rental income, investment income and bond gains. Reducing adjusted net income can mitigate or negate the High Income Child Benefit Tax Charge.
What is the tax charge?
The High Income Child Benefit tax charge claws back up to 100% of any Child Benefit received. For those with adjusted net income between £50,000 and £60,000, the income tax charge is 1% of the total benefit for every £100 of income over £50,000. This means that once you earn over £60,000, you lose all of your benefit through tax. The charge will never be more than the amount of Child Benefit you receive.
How can I reduce my adjusted net income?
The difference between your adjusted net income and £50,000 is the income which gives rise to the tax charge. A good and legitimate way to reduce your adjusted net income is to make a personal pension contribution (relief at source) in the tax year in which the tax charge will apply. Not only can this reduce or negate the High Income Child Benefit tax charge, it will also increase your savings for retirement.
If you have adjusted net income of £55,000 and make a personal contribution of £4,000 net (£5,000 gross), there will be no tax charge and you will get the full Child Benefit. You will also be able to claim higher rate tax relief on the pension contribution, making a further tax saving. For personal pension contributions (relief at source), you pay the net amount (80%) as your pension provider claims the basic rate tax relief (20%) from HMRC and adds it to your pension. If you put £4,000 into your pension, this is £4,000 net. Your pension provider will claim the basic rate tax relief of £1,000 from HMRC and add this to your pension pot. Your £4,000 net contribution plus the £1,000 basic rate tax relief gives a gross pension contribution of £5,000. The gross pension contribution is deducted from your taxable income to give your adjusted net income, which, if £50,000 or below, does not give rise to the High Income Child Benefit tax charge.
For further information on Child Benefit, click here.
Please note that this is general guidance only and not advice. The information given relates to the tax year the article was written and tax and legislation may change in future years.