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Tax Saving Tip 2 - High Income Child Benefit Charge

Child Benefit is withdrawn from households through an ‘income tax charge’ where someone in the household has an ‘adjusted net income’ of over £50,000 in a tax year. To reduce this charge you can either elect not to receive Child Benefit, or equalise your income so you’re below the £50,000 limit by making additional pension or Gift Aid payments or transferring investments to your partner.

‘Adjusted net income’ is broadly:

Income (total income subject to income tax less specified deductions e.g. trading losses and payments made gross to pension schemes)

Reduced by grossed up Gift Aid donations to charity and pension contributions which have received tax relief at source.

In some cases it may be that an individual may want to donate more to charity or make additional pension contributions: for example, to reduce or avoid the charge.

It is important to appreciate that Child Benefit itself is not liable to tax and the amount that can be claimed is therefore unaffected by the charge. It can therefore continue to be paid in full to the claimant even if they or their partner have a liability to the charge. An election may be made not to receive child benefit, if so, the HICBC will no longer apply.

It is only worthwhile making the election if adjusted net income of one partner is in excess of £60,000. For couples who do not share their financial details there is a problem as it is difficult to accurately complete their tax return (or know if they need to contact HMRC to request one) if their own ‘adjusted net income’ is over £50,000 and Child Benefit is being claimed. Only the highest earning partner is liable so this will need to be determined

Paul and Fran have two children and receive £1,789 Child Benefit for 2019/20. Paul earns a salary of £30,000pa. Fran expects an adjusted net income to be £55,000. On this basis the tax charge will be £895.

This is calculated as £1,789 x 50% (£55,000 - £50,000 = £5,000/£100 x 1%). If Fran can reduce her income by a further £5,000 no charge would arise. This could be achieved by transferring investments to Paul or by making additional pension or Gift Aid payments.

If you need any help regarding this, why not get in touch and we would be happy to help.