Child Benefit is a UK-based scheme that helps families raise their kids financially. It is run by the government, offering support to parents. However, in 2013, the High Income Child Benefit Charge was introduced, wherein individuals earning more than £50,000 or high-income earners are taxed, as a result of which, they need to part with a percentage of the child benefits. Is there a way out? Continue reading as we explore the tax penalty on child benefits for high-income earners and how to avoid it to optimize financial planning.
Understanding Child Benefit
As per the law in the United Kingdom, parents get child benefits for every kid under 16. If the child gets formal education or is part of an approved training program, parents get the benefit until the child is 20. Only one parent can make a claim; the amount depends on the number of children you have and the child you are claiming the benefit. For instance, for a single child, the weekly rate is £21.80. For the eldest child, too, the amount is £21.80. For every additional child thereon, the rate is £14.45 per child.
Child Benefit Taxation
According to the UK Taxation System, a family allowance threshold is used to determine child benefit eligibility criteria. Under the present laws, parents earning above £50,000 per year are eligible for reduced child benefits, and parents earning over £60,000 are not eligible for child benefits at all.
In such cases, a High-Income Child Benefit Tax Charge applies to the parent earning the salary. The tax is calculated based on the adjusted net income in the UK.
- For people earning more than the family allowance threshold of £50,000, the calculation is as follows: for every £100 above £50,000, 1% of the total child benefit is deducted.
- For people earning £60,000 or more, the calculation is as follows: You need to pay the entire child benefit charge as tax, which means that the net benefit is zero.
Many refer to this policy as a child benefit tax trap. Remember, in both of these scenarios, the parent who earns the higher salary among the two is liable to pay the tax charge annually when the tax year ends.
What is Adjusted Net Income in the UK?
Adjusted Net Income in the UK (ANI) is calculated after deducting all allowable deductions from the gross income from various sources. Allowable deductions include different components like donations to charitable organizations, pension contributions, etc. High-income earners can strategize on these allowable deductions to manage their ANI and, in turn, reduce child benefits taxes.
Strategizing to Avoid Child Benefit Taxes
If you wish to avoid child benefit taxes since you are a high-earner, you can inform the HMRC of your intention not to get any child benefit. This way, you will automatically be exempted from paying the tax.
However, there are different ways to get child benefits and reduce tax liabilities.
- Maximizing Pension Contributions
As mentioned earlier, one of the allowable deductions from your gross salary is pension, which can be used to calculate the adjusted net income in the UK. The higher the pension contribution, the lower the ANI. Thus, this strategy can help you get child benefits without paying taxes on them. By diverting more considerable funds towards your pension contributions, you mitigate your tax liabilities and make your retirement savings sound and strong. Use an adjusted net income calculator in the UK to determine the correct contribution amount to keep your tax charges minimal.
- Get Non-Cash Benefits
Also called salary sacrifice, this strategy involves showing less salary on paper and taking non-cash benefits in exchange. Speak to a professional accountant to understand this gamut of salary sacrifice and how it can help reduce your tax burden.
- Donations
Residents of the UK have the option of making donations through Gift Aid and getting tax relief in return. Gift Aid donations go to charities and CASCs or community amateur sports clubs. Donations like these are considered to help reduce tax charges on child benefits with reduced ANI.
- Tax Credits
One of the strategies to reduce tax liabilities on child benefits is optimizing tax credits. It is not just managing your ANI; tax credits help you plan your finances holistically. As a high-income earner, you must also look at the investment landscape to maximise your tax efficiency. Investment strategies are essential in tax planning where funds are strategically allocated towards investment vehicles like Individual Savings Accounts (ISAs)—or venture capital schemes to reduce tax liabilities without causing a dent in wealth accumulation.
Choosing Not to Received Child Benefit
While there are strategies like tax credits and pension contributions to reduce tax on child benefits, many high-earners willingly choose not to receive child benefits. That may be an excellent strategy to avoid child benefit taxes, but only in the short term.
In the long term, this may not be an optimized idea. Completing the Child Benefit claim form means you can accrue National Insurance (NI) credits. If you stop working or take a break to look after kids, for example, you can get a State Pension, but it will depend on your NI record. State Pension can be received only if you have accrued NI for at least 10 years and a total of 35 years to get the full pension. This means that you should continue filling in the claim for child benefit even if you have not received any payment against it at present.
Let TaxCan Accountants Help You Avoid Tax Penalty for Child Benefit!
Child benefit is the government’s way of supporting you financially in raising your kids. However, high-earners earning more than the family allowance threshold can find navigating this landscape challenging as they need to pay taxes for child benefits. However, there are ways to mitigate your tax liabilities in such cases by strategically planning to minimise tax penalties. Charitable donations, tax credits, and pension contributions can help avoid such tax charges.
Are you looking for expert guidance on child benefit taxation? Visit TaxCan Accountants to consult with our team of experts.
Additional Links
- Opt Out of Payments: You can choose to claim Child Benefit but opt out of receiving payments, which avoids the tax charge. To do this, you need to contact the Child Benefit Office or fill out an online form through the government gateway​ (GOV.UK)​​ (GOV.UK)​.
- Income Adjustment: Reduce your adjusted net income by making pension contributions, charitable donations under Gift Aid, or trading losses if self-employed. These adjustments can lower your income below the £50,000 threshold​ (GOV.UK)​.
- Self-Assessment: If you or your partner earns above £50,000 and still receive Child Benefit payments, you must declare this via Self Assessment and pay the HICBC. Use the Child Benefit tax calculator to estimate the charge​ (GOV.UK)​​ (GOV.UK)​.
- Threshold Changes: Starting from April 6, 2024, the threshold for the HICBC will increase to £60,000. The charge will gradually increase for incomes between £60,000 and £80,000, offering more flexibility for families​ (GOV.UK)​​ (GOV.UK)​.
For detailed guidance and to manage your Child Benefit payments, visit the UK government’s official pages on High Income Child Benefit Charge and opting out of Child Benefit.
