Do you, or your partner currently earn between £50,000 and £60,000 and have children? Are you currently claiming Child Benefit?
If the answer is 'Yes' to both of the above questions, you need to read on.
Fernleigh Wearden & Co have customers who have received a recent HMRC tax bill as they are unaware that they are able to claim the full amount of Child Benefit if one spouse earns over £50,000 a year. HMRC are attempting to recover the proceeds of this child benefit overpayment by writing to families who have claimed this unwittingly with a tax bill.
Since 2013, families with one parent earning over £50,000 a year are subject to a “child benefit charge” which has the potential to significantly reduce their entitlement – or even remove it completely.
Example
Mark Wearden, Chartered Financial Planner and Fellow of the Personal Finance Society, discusses an example below;
In the case of a family claiming child benefit for two children, a pay rise for the highest earner from £50,000 to £55,000 will result in a reduction in the amount of Child Benefit the family may be able to claim from £1,788.80 to £894.40* a year. It is down to the individual who is claiming the child benefit to notify HMRC that they are no longer entitled to the full amount of Child Benefit. If you don't do this, you can expect a tax bill through the post. In the example above, the tax bill would be £894.40* in the first year.
When taking into consideration that the highest earner would also be a higher rate taxpayer, the extra £5,000 pay rise would attract tax of £2,894.40, the equivalent of paying around 58% tax on that payrise. **
How to avoid this
When working out earnings for this purpose HMRC offsets pension contributions, meaning someone earning just over the threshold could contribute to a pension, potentially;
Boosting their retirement savings
Bringing down their salary for the purposes of the calculation, and therefore continuing to claim the maximum child benefit.
It is almost always in your best interest to contribute to the pension scheme your employer offers if you are employed, and also look to make personal pension contributions on top of this if affordable. For any self employed people, setting up your own personal pension and making contributions could save you thousands of pounds a year in income tax.
If this sounds like something you would be looking to take advantage of, then contact us today to discuss how you can still claim for child tax credit despite your earnings.
* 2018/19 tax year figures
** (40% higher rate tax plus a child benefit reduction)
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