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 two children, are able to reduce their child benefit tax charge and receive an effective tax relief of just over 60%.
This article is relevant to examinable tax year 2023/24 and is correct as at 19 September 2023.
Child benefit continues to be a subject well covered in the CII exams. It is often tested in AF1 and R03 and if the case study/fact-find for R06/AF5 includes a client with earnings over £50,000 and children under the age of 16 (20 if in full-time education), then this subject could well pick you up a few marks.
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 two children, are able to reduce their child benefit tax charge and receive an effective tax relief of over 60%. Share on X
Let’s look at an example
Stan and Rosie have two children, both qualifying for child benefit. They receive £24 each week for the eldest and £15.90 for the youngest child. Rosie does not work, and Stan earns £52,000 – (his ‘adjusted net income’).
The total child benefit they receive is: £39.90 per week x 52 = £2,074.80
The tax charge is 1% for every £100 over the £50,000 threshold. Stan earns £2,000 over the threshold. We therefore divide £2,000 by £100 = 20 and then multiply this by 1% = 20%. The tax charge is therefore 20% of the amount of child benefit so £414.96 (£2,074.80 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 £414.96, making a total of £1,214.96, which is an effective tax relief of just over 60%!
Remember that adjusted net income can also be reduced in the same way by making donations to charity under gift aid.
Grab the resources you need!
If you’re studying for your CII AF1 exam, and you want to feel confident on exam day, you’ll need to prepare as much as possible. Grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the AF1 calculation workbook taster now!
Alternatively, download a taster resource for AF5, R03, or R06 if you are preparing for one of those exams.
