Child Benefit and the High Income Child Benefit Charge
We recently took on a new client and during the fact-finding process discovered that they weren’t claiming Child Benefit. We worked together on building their financial plan and as part of that agreed to increase their pension contributions to help them achieve their agreed objectives. This had the additional benefit of enabling them to receive Child Benefit without having to pay the High Income Child Benefit Charge (HICBC).
Below is some information on Child Benefit and the HICBC and a couple of related case studies.
Child Benefit can be claimed if you are responsible for more than one child under the age of 16 (or 20 if they stay in approved education or training). The first child gets £20.70 per week with each subsequent child getting £13.70, and only one person can claim benefit for each child.
Matters were complicated somewhat when the Government introduced the HICBC in the 2013/2014 tax year, meaning if either parent earned over £50,000 they had to pay a tax charge in their self-assessment at a rate of 1% of the child benefit for every £100 over this threshold. This meant that once their earnings reached £60,000 the child benefit payments were effectively wiped out by the HICBC.
Case Study 1:
The income figure used to test against the HICBC is known as the Adjusted Net Income (ANI) and there are several ways this can be reduced, one example is shown below.
Paul and Mary are married and have 2 children. Paul is self-employed and earns £55,000 a year. He currently does not contribute to a pension. Mary is employed and earns £35,000. Paul will have to pay £894.40 in HICBC which equates to 50% of the Child Benefit over the year. If their budget allows (and assuming there is no danger of hitting the lifetime pension allowance), Paul could choose to contribute £4,000 to his personal pension; this would be grossed up to £5,000 meaning his ANI was now £50,000. In addition to the 20% automatic pension tax relief, he would be able to claim back an additional 20% back via his self-assessment. When combined with the fact that he doesn’t have to pay the HICBC this would give him an effective tax relief of 58%!
Case study 2:
For some families, it may make sense to receive child benefit even if one parent’s ANI is in excess of £60,000.
Simon and Helen are married and have 2 young children aged 2 and 4. Paul is employed in the city and earns £150,000, while Helen gave up work when the children were born and is now a stay at home mum. They chose not to receive Child Benefit as they understood that Simon would have to pay the equivalent back on his self-assessment due to the HICBC, and therefore didn’t see the point.
However, Helen checked her entitlement to the state pension and realised that as she hadn’t been earning for the last four years she hadn’t been accruing national insurance credits during this time, potentially meaning she gets a smaller state pension than would otherwise be the case. If she had started claiming child benefit after the birth of her first child she would not have been in this position, and unfortunately, even if she started claiming child benefit now she could only backdate for 3 months.
This article is purely for information purposes and does not constitute individual advice. For advice on what is suitable please contact a financial adviser who will be able to provide advice based on your individual needs and circumstances.