An estimated 165,000 parents face a hefty tax penalty after missing last month’s deadline to register with the UK tax authorities over their child benefit payments.
Better-off families need to sign up for self-assessment with HM Revenue & Customs (HMRC) if they want to continue to receive their payments, following changes to the benefit in January this year.
Under the new rules, child benefit is withdrawn from families where one parent has a taxable income of more than £50,000 through the tax system.
For every £100 of income earned between £50,000 and £60,000, 1 per cent of child benefit is taken back via your tax return. For example, if you earn £55,000, 50 per cent of your child benefit will be lost.
The new tax is calculated on the income of the highest earner, so combined household income is irrelevant. If just one parent earns more than £50,000 a year, then some or all of the child benefit will be clawed back.
However, your eligibility for child benefit depends not just on earnings but on “adjusted net income”.
This includes all taxable net income, including rental income and income from investments. Benefits in kind count as well.
If you missed the deadline to register, you still need to sign up for self-assessment with HMRC to minimise any penalty. This will be between 10 per cent and 100 per cent of the child benefit sum, in addition to a refund of the amount receive that you were not entitled to.
This means-tested tax could literally cost you thousands of pounds, so what can you do to beat it? Whatever your circumstances, Doug Blanchard looks at various mechanisms to avoid having your child benefit taxed.
Doug Blanchard: The secret of cutting your liabilities without earning the wrath of the taxman
SACRIFICE YOUR SALARY
If your employer runs a salary sacrifice scheme (also known as “flexible benefits”), you can use it to replace taxable earnings with non-taxable benefits, such as increased pension contributions or childcare vouchers.
Say you earn £60,000. You could sacrifice £10,000 of your salary in exchange for an employer’s pension contribution of that amount.
If your adjusted income is just marginally over the £50,000 threshold, you could exchange a small proportion of your salary for workplace medical insurance or a new bike via the cycle to work scheme to take you below the threshold.
BOOST YOUR PENSION
Alternatively, you could make a personal pension contribution. Contributions to an occupational or personal pension are deducted from your income to arrive at an adjusted net income figure.
If you earn £55,000 and make £5,000 of gross pension contributions you will decrease your taxable income to £50,000. This would see you pay a net £4,000 into your pension after tax relief at the basic rate of 20 per cent.
You would also be able to claim back an extra £1,000 in higher-rate tax relief through your self-assessment. You will not only have beaten the child benefit clawback, but also boosted your pension and reduced your income tax liability.
TRANSFER INCOME-BEARING ASSETS
Another option for those with savings and investments and your spouse or partner earns less than you would be to transfer these to your spouse or partner to reduce your taxable income.
DONATE TO CHARITY
Charitable donations are subtracted from earnings to determine your adjusted net income, too. Say, you earn a salary of £50,000 and have an income of £5,000 a year from a portfolio of shares. If you donated £4,000 to a registered charity, this would be grossed up by 20 per cent to £5,000, thereby reducing your adjusted net income back down to £50,000 and eliminating the tax charge on your child benefit.
SET UP A LIMITED COMPANY
Finally, if you are self-employed or contracting through an umbrella company you could consider setting up your own limited company, which would enable you to devise a remuneration structure that would give you a salary below the threshold. You could then take the rest of your earnings in the form of dividends.
Seek advice from a qualified accountant to explore whether this is a viable option for you.
• Doug Blanchard is a financial planner at Acumen Financial Planning in Aberdeen