Recent changes to Child Benefit have resulted in 155,000 people deciding to stop receiving payments, according to HMRC (as at 31^st December 2012).

If you aren’t one of the 155,000 people who have opted out and your earnings are over £50,000, then you will have to complete a Self Assessment tax form. This is because you will be subject to the High Income Child Benefit Charge, which taxes 1% of child benefit paid for every £100 of income between £50,000 and £60,000.  Over £60,000 and its 100% taxed!

However 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.

Consider a family with two children (child benefit of £1,752.40 per annum) and one parent earning £53,000 per annum. They could make a pension contribution of £3,000 gross, which would reduce their adjusted net income to £50,000.  This means they would continue to receive 100% of their child benefit entitlement tax free and they would have made a contribution towards their retirement planning. With tax relief provided by the Government on the pension contribution they would have only actually paid £2,400.

But the good news doesn’t stop there. They can claim an additional 20% tax relief on the contribution as they are higher rate tax payers. This is reclaimed through self assessment and will result in a refund from the tax man of £600! On top of that their child benefit remains intact.

Impressive, Eh?

Let’s just summarise that:

• £3,000 in a pension but it only costs £2,400 up front.
• A refund of £600 after self assessment
• Gets to keep child benefit of £1,752.40 (for two children)

That means that £3,000 in a pension has only cost £1,800 and has saved an extra £525.72 in addtional tax on the child benefit. Now I don’t about you but if someone offered me £3,000 in a pension and it was only going to cost £1,274.28, I’d at least think about it.

If you haven’t received a letter and think they’ve forgotten about you they haven’t. Remember it applies to either parent with an income over £50,000, even if you are not the parent that receives the child benefit.

Why not see if you can make these changes work for you…