Reclaiming lost child benefit – because you need it more than the state
You don’t need me to tell you. For service families these days, life is grim. No wage increases, longer absences, pension decimation, career uncertainty, lower budgets all round. To add insult to injury, if you or your partner earns more than £50,000 per annum (and you won’t need me to tell you this either) the government has taken away some or all of your child benefit allowance.
The current weekly entitlement is £20.30 for your first child and £13.40 for any additional children. But if the person (or their partner) claiming child benefit earns more than £50,000 in a tax year, HMRC will tax you. How much? Well, for every £100 of income over the £50,000 threshold, a 1% reduction will be applied to the amount of child benefit. Where any income exceeds £60,000, a charge equal to the entire amount of child benefit being received will be applied.
This example shows the effects of paying the charge.
Tony has a taxable income of £58,000 and his wife Lucy has no income. They have two children so Lucy receives annual Child Benefit of £1,752. Since Tony’s income is £8,000 over the limit though, he’ll face a tax charge of 80% of that £1,752 (ie; £1,402). Therefore, the overall value of their Child Benefit has been reduced to just £350 (£1,752 – £1,402). Even Labour suggested last week that anyone earning £60,000 these days isn’t rich, so that hurts.
You can recover all or some of it though. Pension contributions made by anyone who earns over £50,000, whether gross contributions to an occupational pension scheme or grossed up contributions to a personal pension will reduce your ‘adjusted net income’. Why is that important? Because if your net adjusted income drops to £50,000, you get all of your child benefit back and because the recovery is graduated, a drop to something closer to £50,000, sees at least some clawback.
So, using Tony as our example, if he pays net pension contributions of £6,400 in the tax year, this will be immediately increased to £8,000 because of the effect of 20% tax relief (and he will receive an additional 20% back at the end of the tax year; more of that in a sec). More importantly, because his taxable income is also reduced by this amount, his adjusted net income falls to £50,000 and no charge is payable. In other words, you now keep all of your child benefit.
By paying the £6,400 then, he’s saved the £1,402 child benefit they would have lost, and assuming all of the pension contribution lies in the higher rate tax band, he’ll also be able to claim that additional £1,600 in tax relief (20% of £8,000) through his tax return. So his £8,000 pension contribution has in fact cost him just £3,398 (£6,400 – £1,402 – £1,600). In this day and age, that’s not bad.
Just because you can do something, doesn’t always mean you should. This strategy won’t be appropriate or right for everyone so always take qualified financial advice that you can trust. If you have any questions please don’t hesitate to drop me a line – and if you know someone who might benefit from this blog, go ahead.. like it and share it. The more people who know, the more money might possibly be saved. And like I said, I’m thinking you need it more than the state.. right?
Good luck.
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