How to Avoid the High Income Child Benefit Tax Charge
The High Income Child Benefit Tax Charge can be tested in the CII R01, R03, R05, R06, AF1, and AF5 exams, so here we remind ourselves how it works and what clients can do to avoid it.
This article is relevant to examinable tax year 2021/22.
First the facts: the charge is to income tax and applies to those who receive Child Benefit where their income (or their partner’s) is over £50,000. The charge is made via self-assessment and does not affect the amount of the payment being received, which continues to be paid as normal.
Where income is above £60,000, the amount of the income tax charge is the same as the amount of Child Benefit received (so you will effectively pay it all back) and where income is between £50,000 and £60,000, the charge is proportioned. The charge is calculated as 1% for every £100 over £50,000.
Let’s look at an example:
Jo is a parent to Alfie – she earns £54,000. As this is over £50,000, she will have to pay the High Income Child Benefit Tax Charge.
For one child, Jo is entitled to claim £21.15 per week which is £1,099.80 per year. The tax charge will be £439.92; this is calculated as
- £54,000 – £50,000 = £4,000
- £4000/£100 = 40
- 40% of £1,099.80 is £439.92
(The HRMC calculator found here rounds down to £439).
How to Avoid the High Income Child Benefit Tax Charge
If this subject comes up in one of the written CII exam papers, then the next obvious question, once you’ve performed the calculation, is to explain how to avoid it.
The model answer will include charitable gifts and pension contributions – both of which affect adjusted net income. (Adjusted net income is total taxable income before personal allowances but less gross gift aid and pension contributions).
So, if Jo makes a gross personal pension contribution of £4,000, this would reduce her income for Child Benefit purposes to £50,000 and it ensures that she does not have to pay any of it back in an income tax charge.
The £4,000 would only cost Jo £3,200 as the pension provider reclaims £800 of basic rate tax relief and invests it in Jo’s pension fund. She can also make a further claim for higher rate tax relief through her tax return.
Gifts of cash to charity under gift aid also reduce taxable income in the same way as an individual pension contribution. Gift aid payments are also paid net of basic rate tax so are also grossed up before being deducted from total income.
Grab the resources you need!
If you’re studying for your CII AF1 exam, and you’re wanting an air of confidence on exam day, 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, you can download the taster for AF5, R01, R03, R05, or R06 if you are revising for any of those exams.
