Average child benefit tax charge hits £1,220, but can you avoid it?
The tax charge recoups some or all child benefit payments from households where the highest earner has income over £50,000.
The Institute for Fiscal Studies estimates that as many as one in five households will be hit by the charge by 2022.
Sean McCann, chartered financial planner at NFU Mutual, said: “Anyone with income of more than £50,000 and living in a household where child benefit is being claimed could be hit by the charge. It’s up to the individual to notify HMRC if there’s a tax charge to pay.
“The self assessment form is quite clear on this issue but people who don’t normally fill out the form – typically those whose sole income is from a salary – are most at risk of falling foul of the rules. The taxman will catch up with them in the long run but this nasty surprise will come with an extra penalty for failing to declare in the first place.
McCann says that it is increasingly common for people who are just over the threshold to reduce or eliminate any tax charge by making a pension contribution to bring down their taxable income. By reducing taxable income some or all of the child benefit can be kept
The effective tax relief on these pension contributions can be huge – up to 65% for someone with three kids.
When the child benefit changes were introduced in 2013, the IFS estimated that around 320,000 families would fall within the £50,000-£60,000 earnings band.
Research last year from Royal London calculated that if each of these people were to contribute an additional £3,000 per year into their pension, they would reduce their child benefit charge by 30% of the amount of child benefit received. For a family with two children this would be a gain of around £536 per year. If all families in this income bracket were to do this, it would be equivalent to £171m.
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 relief 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.”