Changes to child benefit payments for thousands of higher rate tax payers come in to effect in April 2013. Here’s how to keep your tax-free child benefit if you’re a higher rate taxpayer.
If you are a higher rate taxpayer that currently receives child benefit payments you could lose thousands of pounds a year when changes to child benefit come in to effect in April 2013.
Depending on how much you earn it may be possible to reduce your taxable income below the 40% higher rate tax threshold so you still keep these payments.
Here are your options:
Invest in a pension
The quickest and probably the easiest way to keep your child benefit is to increase, or begin making contributions to a pension.
This should be done by salary sacrifice and can be paid into an occupational pension run by your employer or to an independent personal pension.
Doing this will reduce your taxable pay and, depending on your contribution, could bring you beneath the higher tax rate threshold so you get to keep your child benefit payments.
If you have a family to clothe and feed, you may feel that paying into a pension is lower down your list of priorities, however putting more into your pension could leave you better off come April 2013.
For a family with 3 children, child benefit is currently worth £2,449.20 a year, so paying an extra £1,000 or £2,000 in pension contributions would not only boost your retirement savings but is likely to leave you better off overall as well.
There are two main was to set this up, either by simply increasing the amount of your salary that is paid into your pension, or by sacrificing a part of your salary (perhaps a pending pay rise) in exchange for greater pension contributions from your employer.
Throw into the mix the tax relief that you get when you pay into a personal pension and opting to keep under the higher tax threshold this way can be very tax effective.
For more help deciding whether a pension is right for you, read our guide: Should I Get a Pension?
Childcare vouchers
Purchasing childcare vouchers from your pre-tax pay is another way to reduce your taxable income and could help you keep your child benefit.
Childcare vouchers can be used to pay for registered childcare at a nursery, playschool, childminder or after-school club.
Basic rate tax payers purchasing childcare vouchers for the first time can buy up to £55 of vouchers a week. So if your current salary is just over the higher rate threshold it’s worth investigating this option.
Buying the full £55 a week of childcare vouchers could reduce your taxable income by £2,916 a year, which may be a sufficient amount for you to be classed as a basic rate tax payer.
This is because tax-exempt benefits like childcare vouchers are excluded from the tax rate assessment. So, for the purpose of childcare vouchers, you can earn up to £45,391 a year before being classed as a higher rate tax payer.
Even if your child is too young to be left in child care, you can still purchase vouchers and use them at a later date. Although each voucher will have an expiry date they tend to last a long time.
For more information on childcare vouchers, read our guide: How to Get Help with Childcare Costs.
Register as a company
Reducing your pre-tax salary by purchasing childcare vouchers or investing in a pension will be the two options open to most people worried about losing their child benefit payments.
However, depending on your circumstances and terms of your employment you may be able to keep you child benefit by setting up a company.
Essentially this involves setting up your own private limited company, paying yourself a minimal salary and declaring the rest of the money you earn as dividends from your company.
However, this option is best suited to the self-employed as well as freelancers and consultants not directly employed by a business and simply isn’t an option if you are a full time employee earning an annual salary.
This option could also make your personal finances considerably more complicated so you may need to seek advice from an accountant to ensure you are paying the correct levels of tax on all areas.
Change your working patterns
If you or your partner are a higher rate tax payer but the other perhaps works part time or stays at home, it may be worth considering changing your working patterns so you remain eligible for child benefit payments.
The higher earner could take advantage of flexible working arrangements or switch to lighter working hours to drop below the income threshold, while the lower earner could look at increasing their hours if they work part time, or finding some other means of making up the difference.
While this may not be a feasible option for some couples, balancing your salaries a little more evenly could mean you get to keep the child benefit payments and leave you better off overall.
Salary sacrifice?
You may think that you can sign up for a host of different salary sacrifice schemes in order to reduce your income.However company cars, phones and other benefits are considered to be benefits-in-kind and part of your salary.
This means that you don’t get the same perceived salary deduction as with paying into a pension or purchasing child care vouchers.
Take a pay cut?
Taking a pay cut to reduce your income below the higher rate tax threshold so that you can keep your child benefit may seem like the easiest option.
However, while doing this could mean you lose less than doing nothing at all, paying the money you would have scarified into a pension would essentially have the same effect.
Regardless of your attitude to pensions, investing in your future in this way will leave you better off rather than just sacrificing the money so it’s very much worth considering.
If you don’t have a pension, why not try following our Action Plan: How to get a Pension.
Before you take any action to reduce your taxable income it’s important to research the full implications so that you make the right decision for your household finances.
About the Author:
By Martin Lane from money.co.uk
