Are you one of 1.4million families set to lose child benefit? How you can dodge the cut
According to new research from the Institute for Fiscal Studies (IFS), 1million families will lose all of their child benefit in 2019/20.
While, 400,000 are set to lose some of their child benefit entitlement.
This is because the £50,000 salary threshold at which you start being charged a tax to receive the benefit has been frozen since it was first introduced in 2013.
When you earn over £50,000, you are charged 1 per cent for every £100 you earn over £50,000.
This effectively reduces the £20.70 a week for the first child and £13.70 a week for subsequent children you get under child benefit until you start earning £60,000 when the charge wipes out any gain.
Can I claim child benefit?
You get £20.70 a week for your eldest or only child, and then £13.70 a week per child for any additional children.
You may have to pay a tax charge if you (or your partner’s individual income is over £50,000. This is known as the ‘High Income Child Benefit Charge’.
But as more people's wages go up over time, more families will surpass these thresholds.
However, there is an easy way to claw some cash back – and that's to tuck some extra cash into your pension pot as this will reduce the amount in charges you have to pay.
Steve Webb, director of policy at financial provider Royal London said: "The money that goes into your pension is deducted before the high income child benefit charge is worked out.
"This means that your tax charge on your child benefit is reduced if you put extra money into a pension."
He adds that pensions are also a cost-effective way to save. "Contributing into a pension is already very attractive because of the money that an employer contributes and because you get tax relief on the money you put in.
"But if you are affected by the high income child benefit charge then there is an extra advantage."
How much you'll save doing this depends on how much you earn and how much you're willing to stash into your pension.
How much should I save into my pension?
If both parents earn over £50,000, the person with the highest income is the one whose salary is taken into account for the high income tax charge.
In simple terms, take a couple where the highest earning parent makes £55,000 before tax:
- If they paid £500 a year from their salary into their pension they'd reduce their child benefit charge by £53.82 a year if they have one child and by £89.44 if they have two kids.
- If they paid £1,000 a year from their salary into their pension they'd reduce their child benefit charge by £107.64 a year if they have one child and by £178.88 if they have two kids.
- If they paid £5,500 a year from their salary into their pension they'd reduce their child benefit charge by £592.20 a year if they have one child and by £948.22 if they have two kids.
Your income tax band will also play a part in savings because any contributions to pensions are topped up by tax relief of 20 per cent for basic rate taxpayers and 40 per cent for higher rate earners in England, Northern Ireland and Wales (Scotland has different income tax rates).
You'll also need to find out what type of pension you have. For example, do you have a workplace pension that's taken directly from your pre-tax salary or do you have a personal pension that's not linked to your job.
Depending on how you pay into your pension and how tax relief is added, there is a calculator on Gov.uk you can use to work out how much you'll be charged with two fields you can play around with depending on your pension type.
These are the "salary before tax (with pension contributions deducted)" field and the "pension contributions deducted from your pay (don't include contributions deducted before tax)".
A Treasury spokesperson said: “We are spending more than £90billion a year on working-age benefits and this will continue to rise.
"And we are helping families to earn more and keep more of what they earn by raising the personal allowance, increasing the National Living Wage and doubling free childcare.”
We reported last year how hundreds of thousands of families were receiving letters chasing thousands in child benefit tax charges.
Although HMRC later U-turned on this saying some parents would not be charged.
Meanwhile, a mum-of-two told us how she nearly missed out on £8,550 a year state pension due to a child benefit error.
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