High earners may lose out on Child Benefit due to the High-Income Child Benefit Charge. The threshold for earnings used to be £50,000, above which recipients of Child Benefit would face a tax charge. With effect from 6th April 2024 this threshold increased to £60,000, with the Child Benefit fully withdrawn for those with earnings above £80,000. If you're subject to the tax charge, let me explain how you can change this.
For every £200 of income you, or your partner, earn above £60,000 a tax charge of 1% applies to the Child Benefit that you should be entitled to. For example, if you have earnings of £61,000 per annum, a tax charge of 5% of your Child Benefit would apply, for someone with earnings of £62,000 a tax charge of 10% would apply, and so on. Once earnings exceed £80,000, then this is where the tax charge would equate to 100% and Child Benefit is effectively lost.
This tax charge is referred to as the High-Income Child Benefit Charge, and it will apply where either one of the partners in a household has income over £60,000, regardless of what the other partner earns and regardless of who is actually making the claim for Child Benefit.
It’s important to note that even if you feel it’s not worth claiming Child Benefit because you know that the impact of the High-Income Child Benefit Charge will wipe out any benefit to you, claims should still be completed for new children born so that entitlement to National Insurance credits are not lost.
What can you do to mitigate or reduce this charge?
The High-Income Child Benefit Charge is based on your ‘net adjusted income’, and therefore if you can reduce this then you will reduce the amount of the charge and therefore benefit from either part or all of your entitlement to Child Benefit.
So, what is adjusted net income? Well, generally speaking this is your taxable income. This can include employment income, self-employment income, rental income, dividends and any other taxable income.
There are a couple of ways to reduce your adjusted net income without asking to take a pay cut, these are:
1. Pension contributions
2. Gifts to charity
Pension Contributions
Let’s first consider pension contributions, as these will benefit you and your financial future.
The standard Annual Allowance is £60,000. This is the amount that you can pay into a pension in a tax year without incurring a tax charge. It is the maximum amount on which you can receive tax relief, subject to you having sufficient earnings to support a contribution of this size. High earners (those with adjusted annual income over £260,000) will face a reduced Annual Allowance.
If you’re already paying into a pension, either a personal pension plan, a workplace pension or if you’re a member of an occupational pension scheme, you will need to check how much you (and your employer) are paying into those before working out if you have scope to make an additional pension contribution.
Pension contributions deducted from your salary after tax has been calculated and paid to a ‘relief at source’ pension scheme should be declared on your annual tax return as these will also have the effect of reducing your adjusted net income (in some instances you will need to complete a tax return to obtain higher rate tax relief on those pension contributions, so always check!)
If you’re well within the £60,000 Annual Allowance then making a pension contribution from your net income will not only attract tax relief, but it will have the effect of reducing your adjusted net income by the amount of the grossed-up pension contribution.
For example, someone with adjusted net income of £80,000, who faces a tax charge of 100% of their Child Benefit entitlement, could:
make a net pension contribution of £8,000.
receive tax relief at source of £2,000, making the gross contribution £10,000
claim additional tax relief of £2,000 through their annual tax return.
reduce their adjusted net income by the amount of the gross pension contribution (£10,000), from £80,000 to £70,000.
reduce the High-Income Child Benefit Charge to 50%, meaning they could claim half of their Child Benefit entitlement.
In this example, they would need to make net pension contribution of £16,000 (grossed up to £20,000) to negate the tax charge to nil and claim their full Child Benefit entitlement.... worth considering if you have some spare cash!
Gifts to Charity
Making a gift to charity works in a similar way to a pension contribution, in terms of how it reduces your adjusted net income for tax purposes.
For a taxpayer who makes a gift to a registered charity, the charity can claim 20% tax relief on the donation through Gift Aid.
For someone with an annual salary of £70,000, if they make a gift to a charity of £5,000 this would result in the charity being able to claim £1,250 in tax relief through Gift Aid, and the donor would be able to claim an additional £1,250 in tax relief through their annual tax return. The gift would reduce their adjusted net income by £6,250 which means that they would benefit from a 31.25% reduction in the High Income Child Benefit Charge.
It’s always worth speaking to a professional to see how your personal tax situation can be improved.
For a financial review please do not hesitate to contact me.
Charlotte Owen
Independent Financial Adviser
Grosvenor Consultancy Limited
c.owen@grosvenorconsultancy.co.uk
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