How to keep your Child Benefit
Using these three tricks, top taxpayers can keep the tax-free Child Benefit payment after April 2013!
This week around one million households will receive letters from HM Revenue & Customs about possibly losing Child Benefit.
From 7th January 2013 Child Benefit will be adapted so that households where one adult's income is more than £50,000 in a tax year will face a Child Benefit Charge. For those earning above £60,000, the tax charge is 100% of the amount of Child Benefit. For those earning between £50,000 and £60,000, the charge is 1% of the Child Benefit paid for every £100 of income earned between £50,000 and £60,000.
Here are the current rates of Child Benefit, which have been frozen until April 2014:
|
Child |
Per week |
Per year |
|
First or eldest |
£20.30 |
£1,055.60 |
|
Other child |
£13.40 |
£696.80 |
Three ways to beat the system
Here are three ways that top taxpayers can legally beat the system and retain this tax-free support for their families in future:
1. Pump up your pension
The simplest way to avoid losing your Child Benefit is to avoid earning more than £50,000 in the first place.
Anyone who can get their income just £1 below whatever that threshold will keep all of their Child Benefit, which could be worth thousands of pounds a year, free of tax.
The easiest way to sneak below the threshold is to pay more into your pension. For example, paying an extra £2,000 a year into a pension could cut your take-home pay by just £1,200, thanks to 40% tax relief on this contribution if you're a higher-rate taxpayer.
What's more, if this additional pension contribution safeguards your Child Benefit, then it could mean thousands of pounds a year in extra income. One other way of achieving this would be to sacrifice part of your salary, in return for higher yearly pension contributions from your employer.
2. Collect childcare vouchers
A second way for higher-rate taxpayers to slip below the threshold is to collect childcare vouchers from employers. By surrendering some of your pay for these tax-free vouchers, you can reduce your taxable income by up to £243 a month, or £2,916 a year.
Alas, since last April, this allowance has been cut to £28 a week for 40% taxpayers and £22 a week for 50% taxpayers (those earning over £150,000 a year). The good news is that existing members of childcare schemes still get the previous tax-free allowance in place before April 2011. So this change affects only new joiners since 6th April 2011.
Grabbing your full allowance of childcare vouchers could drop your pay below the £50,000 threshold.
3. Become a company
My third -- and most radical -- solution to this Child Benefit problem is to start your own private limited company. This can be a highly tax-efficient way to earn a good income while paying minimal amounts of tax.
For example, you could decide to pay yourself a minimal wage (below the thresholds for income tax and National Insurance), all of which would be tax-free. Then, instead of paying yourself any more in salary, you declare and pocket dividends from your company shareholding.
As long as your total income doesn't exceed the £50,000 threshold, then no extra tax is due on these dividends. However, your company will have to pay corporation tax at the 'small profits' rate of 20% on these dividends.
What's more, any dividends above this level attract higher-rate tax at 32.5%, less a notional tax credit of 10%. In effect, this translates to an effective tax rate of 22.5% of the declared dividend or a quarter (25%) of the net dividend in your hand.
Then again, incorporating as a company isn't an option for most employees, as an anti-avoidance rule known as IR35 requires that you prove you are not simply "an employee at arm's length."
In addition, there is a great deal of paperwork required to be a company director, so you may need to pay an accountant to administer your payroll and tax affairs. Even so, this is a very attractive tax route for high-earning consultants, the self-employed and freelancers like me!
This is a lovemoney.com classic article that has been updated
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LiamT: you may wish to reword your comments. It is rather insulting & ignorant to suggest everyone earning over £40k a year is being "propped up" by those earning less. I earn over £40k. I am the sole earner in household because my wife cannot earn enough to pay the additional childcare costs if she goes to work. Child benefit is the only benefit we receive, and we would gladly hand it back if we could find a way to make it pay for my wife to go back to work. I am required by my employer to live within a certain distance of work, meaning our costs are high. I can assure you we are not being "propped up". I cannot remember the last time we went on holiday and we have no luxuries (no Sky TV - strange how lower earners who you allege are "propping me up" can afford this). Please don't assume everyone's circumstances are the same. In our circumstances £40k a year barely even pays our bills (and we are very frugal and careful with money, our mortgage is our only debt). You probably don't believe this, but our situation is extremely common. I also know plenty of couples who earn less than £40k a year but are significantly better off than us because of the benefits they receive. In what way are they propping me up? Don't get me wrong. I am not expecting handouts or to be "propped up" more than I am already with the fabulous amount of money we receive in child benefit. I merely want you to recognise that £40k a year does not make necessarily make someone wealthy, and that you should never tar everyone with the same brush.
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A trouble with a lot of comments here & the last one is a classic fallacy- is that the population is divisible into two groups. It is not. Stop reading the Daily Mail Tory propaganda anyone from bankers to council cleaners can be made redundant at any time, can suffer serious car accidents , can loose their wealthier partner, can get a serious severe illness , can not keep up the mortgage payments because the firm goes bust or live in area of very few jobs. Welfare and benefits are there to assist citizens when they hit serious hardship and often for most of us we have paid years and years and years of NI contributions and Income tax. We want the welfare state there like other Europeans- if you do not like our system bog off try America and food stamps , or the far East without any social help or South America or India. The Tory party are trying to make you forget this so they can the kick poor without protests.
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Government welfare programs created to buy the votes of those who want someone to take care of them? Japan does not have a welfare system. Work for it or do without. If you cannot afford then don't have. These are possibly the 5 best sentences you'll ever read and all applicable to this experiment: 1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity. 2. What one person receives without working for, another person must work for without receiving. 3. The government cannot give to anybody anything that the government does not first take from somebody else. 4. You cannot multiply wealth by dividing it! 5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.
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04 January 2013