Spend a penny to save a pound when planning to keep your Child Benefit
In January 2013 the new legislation on child benefit payments will come into force, with one in six high earners expecting to see their payments reduced or canceled altogether. This equates to almost 1.2 million families.
High Earning families with three children could end up losing up to £2,500 in child benefit a year. However some of these families could save themselves thousands if they act now. There is a clever tax efficient strategy that can help you boost your retirement savings and help you beat the new child benefit tax regulations. By paying lager contributions into your pension you could look to bring down your total income to below the tax threshold.
What does the new legislation mean for you?
From January 2012 if one parent in a family earns over £50k then this family will have to pay the new child benefit tax. This is regardless of which parent is claiming the child benefit and unaffected by what the second parent is earning. HMRC is looking to send out letters to all families in the next few weeks, detailing what this means for them and the actions they will need to take. Child benefit payments currently stand at £1,055.60 a year for the eldest child and a further £696.80 a year for each additional child. As previously mentioned, if you are a high earner with three children means you could find yourselves up to £2,449.20 a year worse off under the new rules.
When one parent earns over £60,000 the couple will receive no child benefit at all.
Because of the way the system is designed the parents will still receive their child benefit in full, but will be required to fill in a self-assessment form and will see the benefit, or a proportion of it, taken back off them as a lump sum at the end of each tax year. The new child benefit tax charge will be a hard hit for many families next year, especially in households where salaries are distributed unevenly and one of the adults is the breadwinner. There will be opportunities for families whose income is between £50,000 and £60,000 to make higher pension savings which will help them to avoid the new tax. this will also help them to increase their retirement savings. there are still a large proportion of people who make no current pension savings or contributions savings for later in life. This is mostly as people believe they can not afford to save, but as is the case for many families that will see their child benefit payments taxed from next year, not saving for retirement could be a far more costly alternative.
Other ways to save your child benefit can include childcare vouchers, salary-sacrifice schemes and also buying an extra week of holiday.
This is because your inclusion in child benefit after January 7th 2013 is all calculated on your net income after paying items such as pension contributions, charitable donations, childcare vouchers and extra holiday through salary sacrifice.
If parents look to take advantage of these schemes they can lower their net income and possibly fall below the new child benefit threshold.
Therefore someone with three children earning £52,000 would have £1,000 taken off their gross salary for one extra week’s holiday. They would be paying tax and NI equivalent to about 40%, so the holiday would actually leave them about £570 out of pocket. However this would entitle them to receive £240 more in child benefit, so buying the week’s holiday would actually cost approximately £330.
If you would like more information on this, and to see if making these simple changes will allow you to keep your child benefit entitlement then call us on 0208 241 3000.
