Use Pension Contributions to Take Back Child Benefits
Thousands of parents on high salaries are losing out on millions of pounds by not utilising a largely unknown connection between pension contributions and child benefit entitlements, according to recent research by Royal London.
Since 2013, parents who earn £50,000 – £60,000, who are entitled to child benefit (these are tax-free annual payments worth up to £1,076 per child) will be able to take back some money via the tax system. Parents earning over £60,000 are charged 100% of the child benefit.
Despite this, many working families were not aware that HM Revenue & Customs (HMRC) defines the ‘High Income Child Benefit Charge’, determined by the net income of pension contributions. As a result, lots of parents don’t realise that by increasing their pension contributions, they could raise the sum of child benefit they are entitled to, Royal London suggests.
The “adjusted net income” dictates the income threshold at which parents can start to get back child benefit. Adjusted net income is the total taxable income amount before any Personal Allowances and less certain tax reliefs (charitable donations, trading losses etc).
Therefore, it’s feasible for parents to increase their pensions contributions, reducing their earnings to below the threshold and receive the benefit they are entitled to. So, if all parents earning between £50,00-£60,000 gave an extra £3,000 a year (which works out at £250 per month) towards their pension they would qualify to access higher child benefit contributions grossing up to £171million a year.
Sir Steve Webb, director of policy at Royal London, said: “For a higher-earning family, putting money into a pension is already a very attractive option. They benefit from higher rate tax on their contributions and may also get a matching contribution from their employer.
But what they may not be aware of is the additional advantage of reducing the tax charge they face as a higher income family receiving Child Benefit. This is another reason for families in this income bracket to prioritise pension saving and to take advice about their options.”
View the Government’s website for a full explanation of High Income Child Benefit Tax. But for a more personal touch on how to navigate tax speak to gpfm. Our financial planners have a long history of planning wealth around tax legislation, so get in touch with a friendly and expert team member today.
This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions.