If you claim child benefit and anyone in your household earns more than £50,000 then you should be very careful about what we call the “Child Benefit tax-trap”!
How does child benefit work?
It is a state benefit that is non-means tested and usually paid to the Mother for all children aged under 16. It can still be possible to claim up to a child’s 20th birthday, providing they stay in “non-advanced” education. The current weekly rate (2023/24 tax year) is £24.00 for your first child and £15.90 for any additional children. Meaning for a typical family with 2 children under 16, this would be worth £2,074.80.
How does the tax charge work?
A tax charge is levied on the household’s highest earner where that individual’s taxable income exceeds £50,000 in that tax year. Once taxable income exceeds £60,000 in a given tax year, the tax charge will be 100% of the benefit received. For income between £50-£60,000, you will be required to repay 1% of your family’s child benefit for every £100 you earn over £50,000 per year.
The alternative is that you write to HMRC and tell then you want your child benefit to stop, however a little health warning is that if you have a none earning spouse who is relying on receipt of child benefit to make national insurance contributions (for qualification of state pension), opting out of receiving child benefit can also remove any positive impact on their National Insurance record!
If you are required to repay any child benefit, you should complete self-assessment to repay it!
What income is used in the calculation?
This is known as “adjusted net income” or ANI. It includes:
- Taxable income from employment, including any taxable company benefits such as company cars, private healthcare for example)
- Taxable profits from self-employment
- Interest, dividends, and rental income received.
- Any pension income received.
You can then deduct the following from the total:
- Pension contributions (gross value)
- Trading losses
- Gift aid (gross value)
If the total is below £50,000 = no tax charge. If over then self-assessment will be required and a tax charge will need to be paid.
How to avoid the tax charge?
Top up a pension. Any payments made to a pension will effectively reduce your taxable income! Also, any payments to a recognised charity made with “Gift Aid” will also reduce your taxable income. If your employer can and will, you could consider using “salary sacrifice” to pay for any additional benefits.
Where the higher earner holds income producing investments or receives the rental income from property for example, could this be shifted to the lower earning spouse? Where profits from self-employment or dividend income from a business, again could this be shifted across?
Finally – In our opinion a very unfair “tax-trap”
Bear in mind the following situation:
Family 1 (2 children)
Jane earns £100,000 = (£5,554 net per month)
Mike stays at home and earns £0.
Total annual household income £100,000 (gross) or £66,644 after tax & NI
And no child benefit
Total household annual income of £66,644
Family 2 (2 children)
Paul earns £50,000 = (£3,137 net per month)
Jenny earns £50,000 = (£3,137 per month)
Total annual household income £100,000 (gross) or £75,284 after tax & NI
Plus, child benefit of £2,074.80 per year.
Total household annual income of £77,358.80
Family 1 will receive a whopping £10,467.80 after tax, less than family 2, despite both earning the same amounts before tax every year!! Wow!
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