Top Tip – Child Benefit and Pension contributions continued – CII R03, J01 or AF1

Last time, I started off the topic of Child Benefit and what could be done if someone was in danger of losing some/all of it – I mentioned pension contributions and since then I’ve been asked to expand on this point for someone affected this year, so here goes.

Jo was our parent from last time – she earns £54,000 and we worked out that she would suffer a tax charge of £979.60 from 2013/14 (assuming all figures stayed the same).

This year (2012/13) the full income figure will be used but only child benefit from 7th January to 5th April 2013 – for Jo this works out as £612.30 so the tax charge will be 40% of this which equals £244.

So, how to avoid it?

If Jo makes a ‘gross’ contribution of £4,000 into a pension then this would reduce income for child benefit purposes to £50,000 and would ensure the family continues to get full child benefit payments.

The £4,000 would just cost £3,200 as the pension provider re-claims £800 of basic rate tax relief – and she can also make a further claim of £800 through her tax return.

Remember though the contribution needs to be made before the end of this tax year for the £244 not to apply. For 2013/14 Jo will have a full 12 months to make the pension contributions to save the full £979.60.