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Tax Insider Tip: Keeping Your Child Benefit

1st Jul 2015
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The High Income Child Benefit Charge applies from 7 January 2013 where either a person in receipt of child benefit or his or her live-in partner (whether or not they are married or in a civil partnership) has income of £50,000 or more.

The charge is set at 1% of the child benefit awarded for each £100 by which income exceeds £50,000. Where income is £60,000 or more, the charge will equal the child benefit paid in the year.

Where the recipient does not live with a partner and has income of £50,000 or more a year, it is the recipient who will pay the charge. However, where a couple live together, if only one person has income in excess of £50,000 that person will pay the charge. Where both parties have income in excess of £50,000 the person with the higher income will pay the charge. This means the person paying the income tax charge will not necessarily be the same person who receives the benefit.

It is possible for a couple each earning £49,999 (a total income of £99,998) to retain full child benefit, whereas a single person or a household with a single earner with an income of £60,000 will have to repay all the child benefit.

Where one partner has income of more than £50,000, redistributing income may enable the couple to retain their child benefit. Similarly, in a single parent household where income exceeds £50,000, reducing income to below £50,000 by, say, delaying payments, entering into a salary sacrifice or contributing to a pension, may allow child benefit to be retained in full.

Keeping income below £60,000 if it is not possible to reduce income to below £50,000 will mean at least not all child benefit is clawed back.

Those affected by the child benefit tax can choose not to receive the benefit or can continue to receive it but pay it back in tax.

Example:
Henry and Paula both work in the family business. They have two children and receive child benefit of £1,770.60 a year (2014/15 rates).

Henry has income of £65,000 and Paula has income of £25,000. The child benefit is paid to Paula. However, as Henry’s income is above £60,000, he suffers an income tax charge equal to the full amount of the child benefit paid to Paula.

If they are able to reduce Henry’s income to £45,000 and increase Paula’s income to £45,000, the high income child benefit charge will not apply and they will be able to keep the full amount of their child benefit. At current rates this will give them additional income of £1,773.40 for 2014/15, despite the fact that their combined income is unchanged. They will also save tax because more of their income will be taxed at the basic rate rather than at the higher rate.

 

This is a sample tip taken from our 136 page guide:
101 Ultimate Tax Strategies Revealed.

Click here to receive a free copy of this tax saving guide today!

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