If you or your partner earns more than £50,000, the child benefit rules could cost you thousands of pounds a year. Here’s what steps you can take to keep your child benefit.
January 7th introduced cuts to child benefit that affects over one million families. Here’s what you can do to reduce that extra tax charge and help to keep your child benefit.
There are ways to keep your child benefit if you or your partner earn £50,000 or more
Find Out Whether You Are Affected
This seems obvious, but many people are understandably confused as to whether the child benefit cuts affect them or not.
First the basics. If you and your partner both earn less than £50,000 each, then your family will continue to receive child benefit as before without having to pay any money back.
But if you OR your partner has an income of more than £50,000 a year, you will have to pay some or all of your child benefit back. (See here for a full breakdown).
Now here’s where it gets a bit more complicated.
The income that counts as your £50,000 limit is not just your salary but your ‘net adjusted income’. What on earth is that, you ask?
Your net adjusted income is your gross income before tax from all sources. It includes your earnings from:
- Investments and savings
- Taxable benefits
It doesn’t include:
- Pension contributions
- Child care vouchers
- Gift aid donations
A full guide to working out your net adjusted income can be found here.
So if you earned £40,000 a year from your job but also earned £12,000 a year from renting out two rooms, your net adjusted income would be £52,000. As this is over £50,000, you would therefore be hit by the new child benefit charges.
Remember, the new child benefit charges are calculated on the income of the highest earner (your combined household income is irrelevant).
For example: A couple where both have an income of £49,000 a year wouldn’t pay the child benefit charge (as they both earn under £50,000). However, a couple where one earned £20,000 a year and the other earned £51,000 a year would (as one earns over £50,000). See here for more information.
I’m Above The £50,000 Threshold – What Can I Do?
If you or your partner have a net adjusted income of above £50,000, there are a few options available to help you keep your child benefit:
1. Salary Sacrifice
If your employer has a salary sacrifice scheme, you can use it to replace taxable earnings with non-taxable benefits such as childcare vouchers.
As a higher rate taxpayer, you are allowed to sacrifice up to £1,456 of your yearly salary for non-taxable childcare vouchers.
In other words, it can knock up to £1,456 off your net adjusted income. If that reduces your individual income to less than £50,000, you’ll be entitled to full child benefit.
Your employer might offer other salary sacrifice options – for example, you may be able to lower your salary in return for more annual leave. Talk to your manager or HR department to explore your options.
2. Increase Your Pension Contributions
If you earn £53,000 and contribute £3,000 to your pension, you will decrease your taxable income to £50,000 (and therefore be entitled to full child benefit).
Paying into a pension is a double saving because pensions benefit from tax relief – so you will also pay less income tax. (Not to mention have more money when you retire!)
However, it being a pension, you won’t be able to access your money until you are at least 55 years old. See here for more information on paying into a pension.
3. Transfer Your Assets
As mentioned before, the child benefit charges are calculated on the income of the highest earner – not your combined household income.
So say you have an income of £55,000 a year, and your partner earns £20,000. If you transferred £5,000 of your assets to your partner (from investment income for example) you would bring down your net adjusted income to £50,000, and your family would still be entitled to the full child benefit.
4. Give Money To Charity
Any gift aid donations are removed from your net adjusted income. So if you had an income of £50,500 and you made a £500 donation to charity, your net adjusted income would be £50,000 and you would be entitled to full child benefit.
5. All Of The Above
You could do all of the above to reduce your net adjusted income: sacrifice some of your salary for more leave, buy childcare vouchers, increase your pension contribution and give some money to charity in order to keep your child benefit payments.