Making sure children play a part in income tax planning
Currently £20.70 can be claimed for the first child and £13.70 for each additional child. But a child tax charge has been introduced for high earners who qualify for this benefit and, although this charge has been with us for a little while, it is worth revisiting the subject and reminding those affected how they might avoid this tax.
Where a high earning parent earning over £50,000 per annum has not requested that HM Revenue and Customs stop paying child benefit a tax charge will be levied.
Advertisement
Hide AdAdvertisement
Hide AdAnd once taxable income exceeds £60,000 per tax year the tax charge is 100 per cent of the benefit claimed negating the benefit received.
However, if a high income parent wants to do some tax planning they can by making pension contributions.
So for example if someone on £60,000 per year made a net pension contribution of £8,000 it would be grossed up to £10,000 by the Government.
This would have the effect of reinstating child benefit as pension contributions are tax deductible and it would bring the income down to £50,000 per year.
Advertisement
Hide AdAdvertisement
Hide AdAlso for a higher rate tax payer a further £2,000 relief is available making the total transaction extremely tax efficient, as for a net outlay of £6,000 a total benefit of over £11,000 is received with having one child.
If you are affected by the child benefit tax charge and wish to minimise the impact, then you should give careful consideration to adopting this type of planning, provided you have enough disposable income available.
Also you need to be aware that when applying for a mortgage pension payments can be taken into account when assessing affordability.
So make sure that tax efficiency doesn’t take you out of the mortgage market.
Advertisement
Hide AdAdvertisement
Hide AdAs this can be a complex area and there are other options that could be considered to reduce your net income, I would always advocate seeking independent financial advice so you can make the most informed decisions regarding your individual situation.