New analysis by mutual insurer Royal London has found that hundreds of thousands of working families are failing to take advantage of a little-known connection between their pension contributions and their Child Benefit entitlement, causing them to lose up to £171 million per year.
Since 2013, working families where one parent earns more than £50,000 per year face a ‘High Income Child Benefit Charge’ which can wipe out some or all of the value of their Child Benefit on a sliding scale. The family go on getting all of their Child Benefit but when the earnings of the higher earner pass £50,000 they 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%. Where someone in the family earns over £60,000 the tax charge is equal to the amount they get in Child Benefit.
However, what is not well known is that when HMRC measures earnings for these purposes, it is on the basis of income net of pension contributions. This means that those who increase their pension contributions will lower their income for purposes of the High Income Child Benefit Charge and will face a smaller charge as a result. Given that people in this earnings bracket are almost all higher rate taxpayers and effectively get a 40p in the pound contribution to their pension contributions through pension tax relief, additional pension savings for families in this position can represent particularly good value.
In terms of the number of people affected, when the High Income Child Benefit Charge was introduced in 2013, the IFS estimated that around 320,000 families would fall within the £50,000-£60,000 earnings band. If each of these people were to contribute 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. For a family with 2 children this would be a gain of around £536 per year. Across all families in this income bracket this could be a saving on Child Benefit charges of £171 million per year.
Commenting, Steve Webb, Director of Policy at Royal London said:
"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."
Some working families are using pension contributions to ensure that they do not exceed the £50,000 threshold in order avoid facing a Child Benefit charge altogether. 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, comments:
“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.”
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Notes to editors
1) More details of the High Income Child Benefit Charge can be found at: www.gov.uk/child-benefit-tax-charge/overview
2) In 2013 the Institute for Fiscal Studies estimated that around 320,000 families would be earning between £50,000 and £60,000 and caught in the ‘taper’ of the Child Benefit tax charge https://www.ifs.org.uk/publications/
3) The rate of Child Benefit is currently £20.70 per week for a first child and £13.70 for a second child. On an annual basis this is £1076.40 for a one child family and £1788.80 for a two child family. The table below shows the amount of saving in High Income Child Benefit Charge for different levels of additional pension contribution and different sizes of families:
|Number of children|
Extra pension contribution
4) More information on this issue for financial advisers can be found here: http://adviser.royallondon.com/technical-central/pensions/general/child-benefit-avoiding-the-tax-charge/
For further information please contact:
Steve Webb, Director of Policy, Royal London
- Email: firstname.lastname@example.org
- Tel: 07875 494184
About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £117 billion, 8.8 million policies in force and 3,745 employees. Figures quoted are as at 30 June 2018.