Child Benefit – children are taxing
Child Benefit can amount to a reasonable income over the year, with £20.30 per week paid for the eldest child (£1,055 pa) and £13.40 per week for each subsequent child (£697 pa). However, for some, this will soon be coming to an end.
Neil Cox, Yeovil
It was announced in the Budget that Child Benefit will be reduced for those taxpayers earning over £50,000 on 7 January 2013 – and for those earning an income of more than £60,000, a tax charge will be incurred which removes the benefit of receiving Child Benefit altogether. Where income is between £50,000 and £60,000 then the charge will be 1% of the total benefit for every £100 of income over £50,000.
Taxable income includes all rental income, self employed or employed income, full amount of chargeable gains (and any other taxable income) less certain deductions such as pension contributions, gift aid and trading losses. The tax charge will be collected through Self Assessment (Tax Returns) or PAYE (if employed).
Taxpayers earning over £50,000 will be contacted later this year by HMRC. Tax charges for 2012/13 will not be payable until 2013/14 (and for 2012/13 the child benefit tax charge will only apply to the Child Benefit paid between 7 January 2013 and 5 April 2013).
It is possible for recipients of Child Benefit to opt not to receive payments, to ensure that they do not incur the tax charge. However, for new children born, claims should still be completed so that entitlements to NI credits are not lost.
This means there’s another tax trap to watch out for – the Child Benefit Trap. The use of adjusted net income means that pension contributions may be a way to regain Child Benefit, or lessen the impact, if it will bring your income to below the £50,000 threshold.
The table below shows the effective rate of tax relief if a pension contribution is made to regain Child Benefit.
Number of children Total Child Benefit
1 2 3 4 £1,056 £1,752 £2,449 £3,146
1% Tax Charge on £100 £10.56 £17.52 £24.49 £31.46 Tax also paid on the £100 £40 £40 £40 £40 Total Tax Taken on the £100 £50.56 £57.52 £64.49 £71.46 Effective rate of Tax/Relief 50.56% 57.52% 64.49% 71.46%
Likewise, changes in the structure of your business, such as changing profit shares between partners or using a limited company can also help to preserve these valuable benefits. This illustrates the benefit of forward planning and speaking to your Old Mill contact.
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