Any household in receipt of Child Benefit and containing an individual with ‘adjusted net income’ in excess of £50,000 pa will lose some or all of their Child Benefit they used to enjoy (the full amount of benefit is lost once adjusted net income exceeds £60,000 pa).
Whether or not someone becomes subject to the High Income Child Benefit tax charge depends on the level of their ‘adjusted net income’. Where income will fall between £50,000 and £60,000 pa then the household will be entitled to retain some of the Child Benefit and some will have to be repaid (eg. if income falls halfway between £50,000 and £60,000 then half the Child Benefit will have to be repaid as the income tax charge will apply at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000).
If both parents have income over £50,000, the person with the higher income will be liable for the charge. The threshold applies to the individual, not the overall household. This means that if both partners have income of £49,500 and so have a combined income of £99,000, they will not lose Child Benefit.
What is adjusted net income? Adjusted net income is total taxable income less certain tax reliefs, for example for: trading losses, donations made to charities through Gift Aid, pension contributions paid gross (before tax relief), pension contributions paid via the relief at source method. NB: Adjusted net income is not the same as ‘adjusted income’ for the purposes of the Tapered Annual Allowance, this is something else that HMRC targets you with.
Planning options With the above in mind, there are methods of planning that may enable a person to retain their full entitlement to Child Benefit by helping you to reduce adjusted net income and hence alleviate or remove these problems.
- Salary sacrifice –agreeing to sacrifice a portion of salary in order to reduce adjusted net income in return for, say, an employer pension contribution, would mean either the reduction or complete elimination of the child benefit charge or full or partial reinstatement of the Personal Allowance, alongside enhanced pension contributions and NI savings.
- Pension contributions –by making a pension contribution, adjusted net income will be reduced. For some people, it will be possible to reinstate full child benefit entitlement (ie. eliminate the charge) by making a gross pension contribution sufficient to bring adjusted net income down to £50,000 or less or partially reinstate by bringing income to a level between £50,000 and £60,000. These measures effectively mean a higher level of pension tax relief on the contributions made.
- Where couples have savings, dividend, rental or other income that could be rearranged between them in order to achieve a better overall result this is certainly worth considering. In practice, this means if one partner is earning in excess of £50,000, whilst another is well below this threshold, then look to move income to the lower earner.
For more information on the High Income Child Benefit tax Charge https://www.gov.uk/child-benefit-tax-charge/overview
Some people have chosen not to receive any Child Benefit, so then they don't want to pay the extra tax. However, HMRC is encouraging you to still fill out a Child Benefit claim form even if you choose not to actually receive any Child Benefit payments from them. This is because filling your claim form for Child Benefit can help you build up national insurance credits which can help protect your future state pension. This is particularly important if you've stopped work to look after children full time. It can also help protect your entitlement to other benefits such as Guardian's Allowance, and ensure your child is automatically issued with a National Insurance number before their 16th birthday.