A Clever Way of Reducing the Child Benefit Tax Charge
This article shares with you an example where a couple, who are receiving the child benefit for their three children, are able to reduce their child benefit tax charge and receive an effective tax relief of over 65%.
Child benefit continues to be a subject well covered in the AF1 exam and is also useful for those studying R03, R06 as well as AF5.
So firstly, a quick recap on the facts: if someone has adjusted net income between £50,000 and £60,000, the child benefit tax charge is 1% of the total child benefit for every £100 of income over the £50,000 threshold.Here's an example where a couple, who are receiving the child benefit for their 3 children, are able to reduce their child benefit tax charge and receive an effective tax relief of over 65%. Click To Tweet
Let’s look at an example
Stan and Rosie have three children, all qualifying for child benefit. They receive £20.70 each week for the eldest and £13.70 for the other two. Rosie does not work, and Stan earns £52,000 – (his ‘adjusted net income’).
The total child benefit they receive is: £48.10 per week x 52 = £2,501.20
Because Stan earns £2,000 over the £50,000 threshold this is divided by £100 which gives us 20. We multiply this by 1% and apply 20% to the total child benefit received, which means Stan will have a tax charge of £500.24. (£2,501.20 x 20%).
The child benefit can still be claimed, but Stan will have to pay the tax charge through self-assessment or PAYE.
To avoid having to pay this, Stan should make a net pension contribution of £1,600 – this grosses up to £2,000, which is then deducted from his income, leaving him now with an adjusted net income of £50,000 and no tax charge to pay!
What is more exciting though, is that he can also reclaim higher rate tax relief, which means the pension contribution only really costs him £1,200 – saving tax of £800 plus the child benefit tax charge of £500.24, making a total of £1,300.24, which is an effective tax relief of just over 65%!
Remember that adjusted net income can also be reduced in the same way by making donations to charity under gift aid.
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