Pension contributions, childcare vouchers and salary-sacrifice schemes can all help higher-earning parents decrease their income – and reduce the loss of child benefit
Taking an extra week’s unpaid holiday, making pension contributions and buying childcare vouchers can help parents reduce the loss of their child benefit following the introduction of a new tax charge in January.
The child benefit charge, which will be implemented from 7 January, is designed to reduce the amount paid to families where at least one partner earns £50,000 or more, and will wipe out all the benefit paid to those earning £60,000 or more.
Child benefit is tax-free and worth £20.30 a week for the first child and £13.40 for each subsequent child. Accountancy firm PwC has calculated that the cuts will cost a family with three children aged five, three and one, where one partner earns £60,000, more than £50,000 by the time the youngest child turns 18.
However, the calculation is based on “adjusted net income” – income after paying items such as pension contributions, charitable donations, childcare vouchers and extra holiday through salary sacrifice. Parents could take advantage of these to reduce their income and thereby increase the amount of child benefit to which they are entitled.
Paul Belsman, of accountants RSM Tenon, says parents with young children may find the idea of buying an extra week of holiday particularly attractive. “Someone with three children earning £52,000 would have £1,000 taken off their gross salary for one extra week’s holiday. They would be paying tax and NI (national insurance) equivalent to 42%, so the holiday would actually leave them £582 out of pocket. But because this would entitle them to receive £244.90 more in child benefit, buying the week’s holiday would actually cost just £335.”
Frank Nash, of chartered accountants Blick Rothenberg, says the child benefit charge will increase the marginal tax rate for a parent of three children earning £60,000 to 67% (40% income tax, 2% NI and £2,500 lost child benefit); for a parent of two, the marginal rate would be 59.5%.
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