Thousands of professional families across the country in the higher tax bracket are losing up to £171m a year in charges relating to high income child benefit, according to recent research by mutual insurer, Royal London.
The insurer believes that many working families are unaware of a direct connection between their pension contributions and their entitlement to child benefit.
Following new legislation in 2013, working families including a parent who earns over £50,000 per annum will receive a high income child benefit charge of 1% of their child benefit for every £100 earned beyond the £50,000 threshold, up to a maximum of 100%.
In the event a working mother or father makes over £60,000 per annum, the tax charge is equal to the amount they get in child benefit.
Nevertheless, what many professional families are unaware of is that HM Revenue and Customs (HMRC) measures an individual’s earnings on the basis of income net of pension contributions. Subsequently, those who increase the size of their pension contributions – lowering their income for the purposes of the high income child benefit charge – will pay a smaller charge as a result. The outcome is that some borderline families can then retain their full entitlement to child benefit payments.
When the new regime for high income child benefit charges was introduced, the Institute for Fiscal Studies claimed up to 320,000 professional families would sit within the £50,000-£60,000 annual earnings bracket.
The Royal London estimates that if each of these parents contributed a further £3,000 per annum into their pension pot, they would slash their child benefit charges by almost a third (30%) of the amount of child benefit received. This would amount to £536 more per year for families with two children – around £45 a month.
Steve Webb, director of policy, Royal London, said: “For a higher earning family, putting money into a pension is already a very attractive option.
“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.”
Although HMRC has helplines available to assist working families, their staff are not tasked with giving advice on how best to organise your financial affairs in order to minimise the amount of charges you pay.
Your local TaxAssist Accountant can work with you closely to better understand your personal financial situation and offer professional advice on how to keep more of your hard-earned money.
To arrange an initial consultation with your nearest TaxAssist expert call us today on 0800 0523 555 or email us regarding your specific circumstances using our online enquiry form.