Top Ten money-saving tips: Child Benefit

FROM January 2013, anyone with income of more than £50,000 a year must tell HM Revenue & Customs (HMRC) if they receive child benefit themselves, or if they are the higher earner of a couple where one partner is receiving this benefit. Those failing to report could face fines or hefty tax clawbacks in future. Peter Young, tax partner at Johnston Carmichael, offers tips on preparing for the new rules and, where possible, maximising your entitlement.

1 COMPLETE YOUR TAX RETURN

If you receive a notice from HMRC telling you to complete a tax return you must do so. Failure to submit a return on time means you will be fined. Going forward, you are legally obliged to tell HMRC if your partner claims child benefit which you are due to repay under the new rules.

2 FAMILY AND FRIENDS

If one individual in a family unit earns more than £50,000 and the same or another individual in the family unit claims child benefit, then the higher earner will have extra tax to pay from January 2013 onwards. This is the case even if they are not your own children. It is possible to elect not to receive child benefit from January 2013 onwards.

3 CLAIM YOUR TAX RELIEFS

Higher rate taxpayers often assume that the PAYE tax system will collect the right amount of tax from them. But this only happens if HMRC has been notified that you have made personal pension contributions or charitable donations. It is up to you to claim these tax reliefs.

4 USE YOUR PENSION

Pension contributions can be hugely tax-efficient for those with incomes just over £50,000. For example, in a family with four children where one parent earns £55,000 and the other nothing, the high income child benefit charge (HICBC) would be 50 per cent of £3,146 (£1,573). By making a net pension contribution of £4,000 the earning parent would obtain higher rate tax relief of £1,000 and also avoid the HICBC. The actual cost of putting £5,000 into the pension fund is therefore just £1,427 (£4,000 – £1,000-£1,573), so effectively gaining 71 per cent tax relief.

5 TALK TO YOUR FAMILY

Families need to review the most tax-efficient allocation of income among family members where several generations are involved in a business. For example, in a family company or partnership the grandparents may still be involved in running the business, so judicious dividend planning or partnership profit allocation could be used to equalise incomes and reduce the impact of HICBC on young parents.

6 TALK TO YOUR PARTNER

Couples who have not discussed finances with each other will now have to do so to ensure it is the higher earner who pays tax on any child benefit claimed by the family.

7 AND TALK TO HMRC

If a couple get together during a tax year and one of them claims child benefit, then the higher earner may become liable to HICBC for the weeks that the relationship existed. Conversely, if a relationship ends then so can the HICBC charge on that individual. The definition of “partner” is comprehensive and includes same-sex couples. There is a legal obligation to notify HMRC if you become liable to HICBC, and the tax due can be collected under PAYE if you are not already within the self assessment system.

8 OTHER ENTITLEMENTS

State pension ages are rising, which makes creative retirement planning all the more important. It is crucial to understand the link between actual or deemed contribution and the eventual income you get. Full-time mothers of children under 12 are deemed to contribute to their state pensions by claiming child benefit, so failing to claim child benefit (rather than electing not to receive it) can affect future state pension entitlement.

9 GRANDPARENT HELP

Grandparents with surplus assets could make lifetime gifts to their families in order to reduce their own future inheritance tax (IHT) exposure while at the same time helping their children and grandchildren. If investment income takes parents above the £50,000 income threshold for the child benefit tax charge, grandparents may instead wish to consider putting income-generating investments into trust for their grandchildren’s benefit. This is particularly beneficial if a disabled child is involved, but in all trust cases expert advice should be sought.

10 KEEP CALM AND CARRY ON SAVING

Parents who have not relied on child benefit to pay for family essentials may instead have saved what they received in ordinary bank accounts where the parent is taxed on the interest if it exceeds £100 a year. If you have spare cash you could use such as Junior Isas or a pension fund in the child’s name, or even buying premium bonds which give a tax free return. Also consider investing in capital growth assets, given the likely longer timescale until children need to access the cash.