Working families who fall within the £50,000-£60,000 earnings band face a 'High Income Child Benefit Charge' which can reduce the value of their Child Benefit on a sliding scale
Since 2013, families with children whose earnings are in the £50,000–£60,000 bracket face a special tax charge. This is worked out as 1% of their Child Benefit for every £100 earned above the £50,000 threshold, up to a maximum of 100%. This means that if a family earns more than £60,000, the tax charge is equal to the amount they get in Child Benefits and effectively cancels it out.
However, analysis from Royal London has found that hundreds of thousands of working families are not aware that when HMRC measures earnings for Child Benefits, it is on the basis of income net of pension contributions. This would mean that families who increase their pension contributions would lower their income for purposes of the High-Income Child Benefit Charge, resulting in a smaller tax charge.
According to the Institute for Fiscal Studies, it is estimated that around 320,000 families fall within the higher earners’ pay band, which means that they are potentially missing out on this little-known connection between their pensions contributions and their Child Benefit entitlement, causing them to lose up to £171 million per year.
High-earning families are also likely to be higher rate taxpayers and would get a 40p in the pound contribution to their pension contributions through pension tax relief, the opportunity for additional pension savings for families in this position would represent particularly good value.
This would mean that if each of these families contributed an additional £3,000 per year into their pension, they would reduce their Child Benefit Charge by 30% of the amount of Child Benefit received. A family with two children would gain roughly £536 a year, for example.
Robert Rushton, a 34-year-old father of twins from Wales, who does not want to lose out on his Child Benefit if he received a pay rise, notes:
“A few of my friends have done this: save more into their pension so they are not over the £50,000 tax bracket and so still receive their Child Benefit.”
“We are still paying off the mortgage and credit card bills and doing up the house; when you are doing that, every penny counts. My wife’s salary only just covers childcare, so that monthly benefit makes a big difference to us and we don’t want to lose it.”
Steve Webb, director of Policy at Royal London, comments: “For a higher-earning family, putting money into a pension is already a very attractive option. They benefit from higher-rate tax relief on their contributions and may also get a matching contribution from their employer. But what they may not be aware of is the additional advantage of reducing the tax charge they face as a higher income family receiving Child Benefit. This is another reason for families in this income bracket to prioritise pension saving and to take advice about their options.”