Income over £50,000? How to avoid High-Income Child Benefit charge and save 59% in tax

New calculations by interactive investor reveal that it's worth knowing your rights.

January 2023 marked the 10th anniversary of the introduction of the High Income Child Benefit charge.

According to government data, a relatively small number of UK taxpayers (14%) are lucky enough to have total income over £50,000, the point at which the High Income Child Benefit Charge becomes payable.

But everyone’s circumstances are different, and in a rigid benefit system, it’s worth knowing your rights.

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New calculations by interactive investor reveal that parents earning over £50,000 could avoid paying the High-Income Child Benefit charge and save 59% in tax by topping up their pension.

Child benefit, worth £21.80 per week (over £1,100 a year) for the first child and £14.45 a week (over £751 a year) for each subsequent one at present, was a universal payment to families with children until January 2013. Since then, taxpayers with adjusted income of over £50,000 a year are required to pay back some or all of their child benefit under the High Income Child Benefit charge.

As it only applies to the higher earner in a couple, another example could see both partners earn £49,000 and keep all their child benefit, whereas a couple where one person earns above £50,000 will start to lose their child benefit.

Adjusted net income is total taxable income minus certain tax reliefs, for example pension contributions.

This means that a parent earning £52,000, who is already paying 5% of their income (£2,600) into their workplace pension using a net pay scheme, would automatically see their taxable income fall to £49,400, and thus avoid the High Income Child Benefit charge.

A parent earning £53,000 paying 5% of their income (£2,650) into their workplace pension could contribute an additional £350 to their pension to bring their taxable income down to £50,000 (£2,650 minus £350).

In this scenario, parents with two children could potentially save a total of £566 in child benefit, with net cost of top up pension contribution of £198 (pension contribution £350, tax saved £86, child benefit saved £66). When factoring the pension tax relief and the Child Benefit savings, the pension contribution is effectively boosted by 77%.

For parents with one child, the child benefit savings would be £340 with a net cost of pension contributions of £224. Here, the pension contribution is boosted by 56%

Similarly, a parent earning £54,000 who is already paying 5% of their income (£2,700) to their workplace pension through could contribution a further £1,300 to keep their adjusted net income at £50,000.

Here, parents with two children could potentially save a total of £754 in child benefit with a net cost of pension contribution of £589, and the pension contribution is boosted by 121%.

For parents with one child, the child benefit savings would be £453 with a higher net cost of pension contributions of £687. Here, the pension contribution is boosted by 89%.

Alice Guy, Personal Finance Expert, interactive investor, says: “People earning between £50,000 to £60,000 have a shocking 61% tax rate if they have two children. That’s because they pay 42% (40% income tax and 2% National Insurance) and they lose a further 19% of their pay through the high-income child benefit charge.

“Those with private pensions could save more by making additional contributions through tax rebates. If you have kids and earn between £50,000 to £60,000, making a pension contribution could save you 59% tax (40% tax plus 19% child benefit for earning between £50-£60k). A £100 private pension contribution (which becomes £125 after pension tax relief) will save you £74 in tax. £25 tax relief is added automatically to your pension, another £25 is due through a tax rebate at the end of the year and you save £24 in child benefit payments. Or put another way, it only costs you £51 (£100 minus £25 tax rebate, minus £24 child benefit) to add £125 to your private pension.

“Don’t forget that to get a tax rebate for private pension contributions you need to write to HMRC if you’re a higher-rate taxpayer and you don’t do a tax return. Many higher-rate taxpayers are paying too much tax because only basic rate pension tax relief of 20% is added automatically to private pension payments. They’ll need to claim the additional 20% through their tax return or by writing to HMRC.”

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The existing downright baffling rules which leaves child benefit payments out of reach if just one parent earns above the £50,000 threshold but does not apply if both parents earn just below the threshold – or if one partner doesn’t work at all. While a £50,000 annual salary is well over the national average, everyone’s circumstances are different, so it’s worth knowing your rights. Some people might also find it a source of contention that the £50,000 threshold hasn’t risen in line with earnings, especially giving the rise to the cost of living, which has put extra pressure on household budgets.

“But parents paying the High-Income Child Benefit Charge may not know that they could claw back some, if not all, of their child benefit through pension contributions. Parents earning £52,000 paying 5% into their workplace pension will automatically avoid the High Income Child Benefit charge.

“In our scenario of a parent earning £53,000 could save £566 in child benefit due to their pension contributions. Contributing an extra £350 on top of their normal 5% contribution would only cost £198 after tax and child benefit saved, giving an immediate boost of 77%, which in turn, would be turbocharged by the magic of compounding over the years.”

Potential workplace pension top-up savings for parents with two children

Potential workplace pension top-up savings for parents with one children

Source: interactive investor.

Assumptions:

· 5% pension contributions.

·  Earner is highest earner in household.

·  These are assumptions only and should not be treated as advice.