The Child Benefit changes in January 2013 resulted in over 460,000 people choosing to stop receiving the payment, rather than be impacted by the High Income Child Benefit Charge, which now affects around one million families.

The charge is levied on any family where  either parent/claimant earns more than £50,000. For those earning between £50,000 and £60,000 then they are taxed at 1% for every £100 of income within this band. Over £60,000 and it’s 100% taxed! If they have not chosen to opt out of receiving the payment then they will continue to receive the benefit but it means they must complete a self assessment tax return to enable HMRC to assess how much they need to pay back.

Now while many people are already registered to complete a self assessment (SA) tax return it seems that many families who have never needed to complete one have been caught out. As they have not registered they are now liable for a ‘failure to notify penalty’. Earlier this month HMRC stated that close to 100,000 people had failed to register. So first thing’s first, make sure you register for self assessment if you or your partner’s income is over £50,000 and you are in receipt of child benefit.

Once you have registered though, it doesn’t mean that the job is done. You do have options available to you to potentially limit or reduce the amount you have to pay back in tax. But if you want to take action for this tax year you need to do it before 6th April 2014!

The actual level that HMRC use to determine your income figure is your adjusted net income.  Adjusted net income is your income minus any pension contributions and payments to charities, so by making contributions to either of these can really make a difference. Click here to read a past blog written by Huw Jones on how contributing to a pension can safeguard your child benefit.

There are other ways though including:

1. Taking advantage of a salary sacrifice scheme, if offered by your employer, to pay into your pension and reduce your contractual income. In addition to the tax savings, the employee will also save NI at 2% for payments over the upper earnings limit. It’s also worth checking out the options if your employee offers a salary sacrifice scheme for child care vouchers. This works in a similar way to making a pension contribution although limits do apply to the number of vouchers that can be purchased.
2. Where both partners are making a pension contribution, changing the contributions so the higher earner makes lower contributions and the lower earner ups theirs, means that the high earner’s net income could fall below the threshold level, with no extra cost to the family as a whole.

It can all seem very complicated, and for many people earning over the £60,000 level who are just starting a family, the fact that they will not be financially better off may prevent them even registering for child benefit. However care is needed if one parent chooses to stay at home to look after the children (and is not working). As they won’t be paying national insurance (NI) they won’t be contributing towards their state pension. However if they do choose to claim it for a child under 12, they will receive NI credits  which will protect their entitlement to a full state pension.

If you would like to discuss what you can do to safeguard your child benefit entitlement as part of your investment strategy  give us a call on 01666 829224.