Child Benefit Charge – Planning

6th March 2019

Having had several discussions recently regarding the child benefit charge please see below a reminder on when it applies and what can be done to mitigate it.

The high income child benefit charge was introduced in 2013 as a way for HMRC to recover some/all of the child benefit paid where net adjusted income is in excess of £50,000. The charge is calculated as part of the self-assessment tax return and is payable at 1% of the child benefit for each £100 of income over £50,000. This means by the time net adjusted income reaches £60,000 you have to pay all of the child benefit received back to HMRC. These thresholds have not increased since they were introduced in 2013 and as incomes rise more people will be caught by the charge.

One area that seems to catch people out is that the charge is payable by the highest earner but is based on whether the household receives the benefit. It is therefore not uncommon that one partner may have applied for and receive the benefit but it is the other that has to declare and pay the charge.

If you are claiming child benefit for 2 children the effective tax rate on income between £50,000 and £60,000 can approach 60% (if you have 4+ children that you claim for this becomes in excess of 70%) so planning in this area can save a significant amount of tax.

For the self-employed capital expenditure in a particular year could bring profits below £50,000 and a Limited Company can be used to smooth personal income and plan around this.

Personal pension contributions can be used by the above as well as those who are employed as these are taken into account to arrive at net adjusted income. They can be very effective if your income is in the £50,000 to £60,000 bracket as the actual ‘cost’ of making the contribution can be relatively small compared to the amount added to the pension.

If further advice/planning would be helpful in this area or if you have to complete a self-assessment tax return because of the charge please contact us.

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